Private Mortgage Insurance (PMI) is an insurance policy that protects the lender if a borrower with a conventional mortgage defaults. It’s typically required when the borrower’s down payment is less than 20% of the home’s purchase price.
Lenders view loans with low borrower equity as higher risk. PMI mitigates potential losses by covering a portion of the loan balance if the borrower defaults.
Borrowers pay PMI premiums (usually monthly) added to their mortgage payment. The policy benefits the lender, not the borrower, reducing lender risk on low-down-payment loans.
Most conventional loans require PMI when the Loan-to-Value (LTV) ratio exceeds 80%. For example, a 5% down payment on a $200,000 home creates a 95% LTV, triggering PMI.
VA and USDA loans don’t use PMI. VA loans charge a one-time funding fee, while USDA loans include an upfront and annual MIP (Mortgage Insurance Premium) instead of traditional PMI.
FHA loans require MIP regardless of down payment size. Unlike borrower-paid PMI on conventional loans—which can be canceled—FHA MIP often lasts the loan’s lifetime or until refinancing into a conventional mortgage.
PMI rates vary based on credit score, down payment size (LTV), loan amount, and loan term. Higher credit scores and larger down payments yield lower PMI rates.
Annual PMI premiums typically range from 0.3% to 1.5% of the original loan amount. A $200,000 loan could cost $600–$3,000 per year ($50–$250 per month).
On a $190,000 loan (5% down on a $200,000 home) with a 0.7% PMI rate:
190,000 x 0.007 = $1,330 annual premium ÷ 12 = ~$110 monthly PMI.
Your monthly mortgage payment includes principal, interest, taxes, insurance (PITI) plus PMI if required. PMI appears as a separate line item.
While PMI itself isn’t interest, it increases your total housing cost until canceled. More of your payment goes toward insurance rather than principal reduction.
Factor an extra $100–$300 per month into your budget for PMI if your down payment is under 20%. This ensures you qualify for loan approval and maintain comfortable cash flow.
Saving more to reach a 20% down payment eliminates PMI altogether.
A piggyback loan involves an 80% first mortgage, 10% second mortgage, and 10% down payment—bypassing PMI by keeping the first loan LTV at 80%.
With LPMI, the lender pays the PMI premium upfront but charges a slightly higher interest rate. LPMI can’t be canceled but often results in similar or lower monthly payments.
Once your home equity reaches 20%, you can refinance into a conventional mortgage without PMI—especially attractive if interest rates have dropped.
By law, lenders must automatically cancel PMI when your principal balance reaches 78% of the original home value (22% equity).
You can request PMI removal once your loan-to-value ratio hits 80%. Submit a written request to your lender and meet any payment histories or seasoning requirements.
Lenders may require a new appraisal to confirm current market value. Re-amortization recalculates payments on the lower balance, ensuring accurate loan terms post-PMI removal.
If you miss requesting PMI removal at 80% LTV, lenders still must cancel automatically at 78% LTV. However, you may pay unnecessary premiums if you delay your request.
PMI premiums may be tax-deductible as mortgage interest if you itemize deductions, subject to income limits.
Under current IRS rules, the deduction phases out for taxpayers with adjusted gross income above $100,000 ($50,000 if married filing separately).
Report deductible PMI on Schedule A (Form 1040) under “Home Mortgage Interest and Points.” Keep PMI statements from your lender for accurate reporting.
Alex buys a $400,000 home with a $40,000 down payment (10%). His conventional loan has an LTV of 90%, triggering PMI of roughly 0.8% annually.
By avoiding a $200–$300 PMI payment, Alex increased monthly cash flow and accelerated equity building in both loans.
Yes. Options include VA or USDA loans, piggyback second mortgages, or lender-paid mortgage insurance.
PMI payments don’t directly impact credit score. However, missed mortgage payments (including PMI) can damage your credit profile.
Borrowers can shop lenders for competitive PMI rates, as premiums vary by insurer and loan originator. Compare quotes before locking in.
Borrower-paid PMI adds a monthly premium. Lender-paid PMI is financed by a higher interest rate, with no separate cancellation option.
PMI allows buyers with less than 20% down to access conventional loans but adds monthly costs until equity reaches 20–22%.
Request Loan Estimate forms from multiple lenders, compare PMI rates, and factor total mortgage costs—including interest and insurance.
