What is Private Mortgage Insurance (PMI)?

Key Takeaways:

• PMI is required for conventional loans with less than 20% down.
• It increases your monthly costs, but can be removed once you reach 20% equity.
• You can avoid PMI with a larger down payment, VA loan, or piggyback loan.

If you are buy a house and plan to cut less than 20%, chances are you’ve come across the term PMI. But what is it, why do you need it and how much will it actually cost you? Whether you have a house in Denver, CO or look at homes for sale in Tampa, FLUnderstanding PMI is the key to smart budgeting.

In this Redfin article, we explain everything you need to know private mortgage insurance (PMI) – including how to avoid or remove them when the time is right.

What is Private Mortgage Insurance (PMI)?

PMI stands for private mortgage insurance. It’s a type of insurance that protects your lender, not you, if you stop making your mortgage payments.

Lenders require PMI to be enabled conventional loans when your deposit is less than 20% of the purchase price of the home. While it helps you buy a home with a smaller upfront investment, it increases your monthly costs.

Why do lenders need PMI?

PMI reduces the lender’s risk. If you put down less than 20%, you are considered a higher risk borrower. PMI provides the lender with a financial safety net in case you default on your loan.

Types of Private Mortgage Insurance

There are different types of PMI, and which one is right for you depends on your financial situation and your lender’s policies:

• Borrower Paid PMI (BPMI): This is the most common type. You pay the premium as part of your monthly mortgage repayment. It can be canceled once you reach 20% equity.
• Lender Paid PMI (LPMI): The lender pays for the insurance, but you usually get a higher interest rate in return. This type cannot be canceled. Removing it will require refinancing.
• PMI with one-time premium: You pay the entire premium up front at closing, in cash or financed with your loan. It lowers your monthly payment, but comes with risk if you sell or refinance early.
• Split premium PMI: A mix of prepayments and monthly payments. You pay part of the premium in advance and the rest in monthly installments.

Understanding the differences can help you choose the most cost-effective option based on how long you plan to live in the home and your budget.

How much does PMI cost?

The cost of PMI depends on a number of factors, including your loan amount, credit scoreAnd deposit. But here’s a general idea:

• Typical PMI costs: 0.3% to 1.5% of the original loan amount per year
• Example: With a $300,000 loan, PMI could cost $75 to $375/month

Tip: Sometimes you can reduce PMI rates by improving your credit score or put down more money up front.

Filip Telibasa, CFP and owner of Gasoline wealthsays many homeowners are surprised by refinancing-related costs such as prepaid taxes and insurance, escrow financing requirements, transfer taxes in certain states, and the reality that refinancings without closing costs still incur fees somewhere in the loan structure. He recommends requesting a full loan estimate early in the process and comparing the total amount of money, rather than just focusing on the monthly payment.

Ways you can pay for PMI?

PMI can be paid in different ways, depending on the loan and lender:

• Monthly premium (most common): Included in your monthly mortgage payment
• Premium in advance: Paid at closing
• Hybrid: Some paid in advance, some monthly

Your lender will explain your options during the loan loan application procedure.

When and how to remove PMI

PMI is not permanent. You can remove it once you have built up sufficient equity in your home.

You can request PMI cancellation when:

• You have achieved 20% equity in your home (based on the original purchase price)
• You have a good payment history
• Your mortgage is current

PMI is automatically deleted when:

• You achieve 22% equity in your home (if you are current with payments)

You can also refinance your mortgage if you value of the house has increased significantly, allowing you to eliminate PMI sooner.

Telibasa notes that homeowners should evaluate refinancing beyond just securing a lower interest rate. He says the true breakeven point depends on how long you plan to live in the home, whether the lower payment meaningfully improves cash flow, and what you want to do with the savings each month. For some homeowners, investing the difference can create more value in the long run than increasing discretionary spending.

Check out our guide: How much equity do I have in my house? Here you can read how to calculate the equity in your home

How to avoid PMI altogether

Here are a few ways to skip PMI when buying a home:

• Put down at least 20% on a conventional loan
• Consider Lender Paid PMI (LPMI): The lender covers the insurance, but usually charges a higher interest rate
• Take advantage of a piggyback loan: Take out a second loan to cover part of the down payment
• Explore VA Loans (for eligible veterans and service members), which does not require PMI

PMI vs. other types of mortgage insurance

Not all loans use PMI. During research mortgage insuranceit is easy to confuse PMI with other similar-sounding terms. Here’s a quick overview of the differences:

What is the difference between PMI, MIP and MPI?

• PMI (private mortgage insurance): Required for conventional loans when your down payment is less than 20%. Protects the lender if you default.
• MIP (mortgage insurance premium): Required for FHA loans. Unlike PMI, MIP is typically required for the life of the loan unless you refinance.
• MPI (Mortgage Protection Insurance): Optional insurance that pays your mortgage if you become disabled, lose your job, or die. This protects you or your family, not the lender.

Understanding these terms can help you choose the right loan product and avoid unnecessary confusion during the mortgage process.

Is PMI worth it?

PMI increases your monthly housing costs, but it can be a worthwhile trade-off if it helps you become a homeowner faster. This is especially true in fast-growing markets, where home prices can rise faster than you can save for a 20% down payment.

It’s not ideal for every buyer, but if you’re financially stable and plan to stay in your home long enough to build equity, PMI can be a short-term expense with long-term benefits.

Benefits of PMI:

• Buy a house sooner: Avoid waiting years to save a full 20% down payment.
• Start building equity right away: Rising home values ​​can exceed your savings rate.
• PMI can be temporary: Most borrower-paid PMI can be removed once you reach 20% equity.
• Potential tax deductions: PMI premiums be able to are deductible (consult a tax advisor).

Disadvantages of PMI:

• Added monthly costs: Can range from €75 to €375/month or more depending on your loan.
• Does not protect you: PMI covers the lender, not the borrower, in the event of default.
• In some cases more difficult to remove: For example, lender paid PMI (LPMI) requires refinancing.