PMI Explained

PMI — private mortgage insurance — is a monthly charge on most loans where you put down less than 20%. Here is the key thing to understand up front: you pay the premium, but it protects the lender, not you. It exists so a lender will lend to someone with little equity in the home. Understanding what it costs, when it ends, and how to avoid it can save you thousands.

What PMI actually is

When you put down less than 20%, you start with less than 20% equity. From the lender's view, you are a higher risk — if you default and the home has to be sold at a discount, the lender may not recover the full loan. PMI is an insurance policy, arranged by the lender but paid by you, that reimburses the lender if that happens.

Two things follow. First, PMI does not protect you: if you fall behind, it will not make your payments or stop a foreclosure. Second, PMI is priced on your risk profile, which is why the cost varies so much from one borrower to the next.

What PMI costs

PMI typically runs 0.5% to 1.5% of the original loan amount per year, paid in monthly installments. The exact rate is set by your credit score and your down payment size.

• A strong borrower (760+ score) with 15% down might pay around 0.5%.
• A weaker borrower (660 score) with 3% down might pay 1% or more.

Here is what that means in dollars on a $400,000 loan (after a 5% down payment):

• 0.5% rate: $2,000 a year, or about $167 a month
• 1.0% rate: $4,000 a year, or about $333 a month
• 1.5% rate: $6,000 a year, or about $500 a month

A useful shortcut: PMI costs roughly $40 to $125 a month for every $100,000 you borrow, depending on your profile. On a $300,000 loan, budget somewhere between $125 and $375 a month. The HomeMath calculator includes a PMI field so you can see exactly what it adds to your own payment.

Why lenders require it

The logic is pure risk pricing. With 20% down, you have enough equity that a default would likely still leave the lender whole after a sale. Below that, the lender's exposure grows quickly — a 3% down borrower has almost no cushion against a price drop. PMI transfers that risk to a mortgage insurer, which is what lets lenders offer low-down-payment loans at all. Without PMI, 3% and 5% down loans would largely disappear.

How to avoid PMI entirely

The cleanest way is to put down 20%. No PMI, ever. On a $400,000 home, that means $80,000 down instead of $20,000. That is a lot of cash, which is why so many buyers accept PMI as the price of buying sooner.

Three other routes skip PMI:

• VA loans: no PMI and no down payment for eligible veterans and service members — though there is an upfront funding fee.
• Piggyback loans: an 80-10-10 structure, where a second mortgage covers part of the down payment so the first mortgage stays at 80% and avoids PMI. The second loan has its own (often higher) rate, so do the math.
• Lender-paid PMI: the lender covers the PMI but bakes the cost into a slightly higher interest rate. You avoid the separate line item, but you still pay — in the rate, potentially forever.

Weigh each against simply paying PMI for a few years. Sometimes a temporary PMI charge is cheaper than a permanently higher rate or a second loan.

How to remove PMI once you have it

PMI does not last forever on a conventional loan. Two triggers end it:

• Request at 80% loan-to-value (20% equity). Once your payments bring the balance to 80% of the original home value, you can ask the lender to cancel. You will typically need a good payment history and possibly a new appraisal.
• Automatic at 78% loan-to-value. By law, the lender must cancel PMI automatically once you reach 78% of the original value, as long as you are current on payments.

The subtlety: home appreciation can get you there faster. If your home has risen in value, your actual equity may hit 20% years before your scheduled payments would. You can often request cancellation early with an appraisal showing the higher value — a few hundred dollars for an appraisal can eliminate a monthly PMI charge years early. See how to remove PMI for the exact process.

PMI vs FHA mortgage insurance (MIP)

Do not confuse PMI with FHA mortgage insurance. They serve a similar purpose but work differently:

• PMI (conventional): 0.5% to 1.5% a year, and it drops once you reach 20% equity.
• FHA MIP: an upfront premium of 1.75% plus an annual premium of 0.55% — and on most FHA loans with under 10% down, it lasts the entire life of the loan.

That lifetime MIP is one of the biggest reasons a conventional loan beats FHA for borrowers with strong credit, even when the FHA down payment is lower. If you go FHA, plan to refinance into a conventional loan once your equity and credit improve.

Frequently asked questions

Does PMI go away automatically?

On conventional loans, yes — automatically at 78% loan-to-value, and by request at 80%. FHA MIP often does not, unless you refinance or put down at least 10%.

How much is PMI on a $300,000 loan?

Roughly $125 to $375 a month, depending on credit score and down payment. Run your own numbers with the PMI field in the calculator.

Is PMI tax deductible?

It has been in some tax years, but the deduction frequently expires and is not available every year. Do not count on it.

Can I refinance to get rid of PMI?

Yes. If your home has appreciated enough that you now have 20% equity, refinancing can remove PMI — though you will pay closing costs, so weigh those against the monthly saving.

See exactly what PMI adds to your payment with the HomeMath mortgage calculator — it is a separate line you can toggle on and off.