Definition
Private Mortgage Insurance (PMI) is an insurance policy the borrower pays on a conventional mortgage when the down payment or home equity is less than 20%. PMI protects the lender against loss if the borrower defaults, enabling buyers who can’t afford a 20% down payment to qualify for a mortgage sooner.
How PMI works
- PMI protects the lender, not the borrower — it doesn’t cover missed payments or prevent foreclosure.
- Payment structure: PMI is commonly charged as a monthly premium added to the mortgage payment, an upfront fee, or a combination of both.
- Cost factors: the loan amount, down payment size, and the borrower’s credit score determine the PMI rate.
- Removal: once the borrower builds sufficient equity (see “When PMI can be canceled”), PMI can be stopped and the monthly payment reduced.
Typical costs
- Annual PMI rates generally range from about 0.5% to 1% of the loan amount.
- That typically equals roughly $30–$70 per month for every $100,000 borrowed, though exact figures vary by lender and borrower profile.
Payment options
- Monthly PMI: most common; added to the mortgage payment.
- Upfront PMI: one-time premium paid at closing (sometimes combined with a smaller monthly charge).
- Lender‑paid PMI (LPMI): the lender pays the insurance but charges a higher interest rate; borrower avoids a separate PMI line item but may have a higher long-term interest cost and less flexibility to remove PMI without refinancing.
When PMI can be canceled
- Request cancellation: borrowers can usually request PMI cancellation once they reach 20% equity based on the original purchase price or current valuation (through principal payments or appreciation).
- Automatic cancellation: many lenders will automatically cancel PMI when equity reaches about 22% (provided payments are current).
- Refinance: borrowers who refinance after gaining 20%+ equity can eliminate PMI if the new loan-to-value is 80% or lower.
Real-world examples
| Scenario | Example Details | Outcome |
|---|
| Buyer puts down less than 20% | Purchases $400,000 home with 5% down ($20,000) | PMI required until borrower reaches 20% equity; PMI paid monthly as part of mortgage. |
| Smaller down payment increases monthly cost | $200,000 home with 5% down | Borrower pays about $80/month PMI in addition to mortgage vs. no PMI with 20% down; enables buying sooner but with higher monthly cost. |
| PMI cancellation through equity | Borrower reaches 22% equity through payments/appreciation | Lender automatically cancels PMI, reducing the monthly payment. |
| Lender-paid PMI option | Lender pays PMI upfront but charges a higher interest rate | Borrower avoids monthly PMI fees but cannot cancel PMI directly; may refinance later to remove the higher rate and PMI cost. |
Context and why PMI exists
- PMI lowers lender risk so more buyers without large down payments can access conventional mortgages.
- It is different from government‑backed mortgage insurance (such as FHA or VA programs) and from homeowners insurance — PMI specifically protects the lender on conventional loans.
- PMI became widespread as lending markets expanded; it helped lenders absorb risk but has also been part of debates around lending standards.
- Recent fintech and automated underwriting systems have made PMI pricing and approval quicker and more efficient for borrowers.
Practical tips for buyers
- Compare lender quotes: PMI rates and structures vary; ask for annual rate, monthly cost, and upfront options.
- Consider the tradeoff: a smaller down payment means buying sooner but paying PMI until equity grows.
- Keep an eye on equity: track principal reduction and home value; request PMI cancellation once you hit 20% equity and confirm automatic cancellation rules.
- Evaluate refinancing when interest rates and equity position make it cost-effective to remove PMI.
- Improve your credit score before applying — lower PMI rates typically go to borrowers with stronger credit.
Bottom line
Private Mortgage Insurance (PMI) is a common cost for conventional loans with under 20% down. It protects the lender and enables earlier homeownership at the price of added monthly or upfront expense until sufficient equity is reached. Understanding PMI costs, payment methods, and cancellation rules helps borrowers plan mortgage expenses and choose the right loan structure.
