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Private Mortgage Insurance (PMI) is often required when you put down less than 20% on a conventional loan. While it adds to your monthly payment, understanding PMI can help you make informed decisions about your home purchase and potentially save money.

What is Private Mortgage Insurance?

PMI is insurance that protects your lender if you default on your loan. It's typically required when your loan-to-value ratio (LTV) exceeds 80%, meaning you've put down less than 20%.

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LTV Calculation Example

Purchase Details

Home Price: $400,000

Down Payment: $60,000 (15%)

Loan Amount: $340,000

LTV Calculation

$340,000 ÷ $400,000 =

85%

PMI Required (LTV > 80%)

Types of PMI

Borrower-Paid Monthly Premium (BPMI)

The most common type, paid monthly with your mortgage payment.

Cost Range

0.3% to 1.5% annually

Cancellation

When LTV reaches 78%

Tax Benefit

May be deductible

Single Premium PMI

Paid as a one-time upfront payment at closing.

Advantage

Lower monthly payments

Disadvantage

Higher closing costs, non-refundable

Lender-Paid PMI (LPMI)

Lender pays the premium but charges a higher interest rate.

Rate Increase

0.25% to 0.50% higher

Important Note

Cannot be removed

PMI Cost Comparison

$300,000 5% ($15,000) 0.85% $214/month $300,000 10% ($30,000) 0.65% $146/month $300,000 15% ($45,000) 0.45% $101/month

How to Remove PMI

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Automatic Removal

Your lender is required by law to automatically remove PMI when:

LTV reaches 78% based on original property value
You've reached the midpoint of your loan term

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Borrower-Requested

You can request removal when LTV reaches 80%:

1
Good payment history (no late payments in 12 months)
2
Verify property value hasn't declined
3
Pay for appraisal if required

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Money-Saving Tip

Make extra principal payments to reach 80% LTV faster. On a $300,000 loan with PMI at $200/month, removing PMI 2 years early saves $4,800!

Alternatives to PMI

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80-10-10 Loan (Piggyback Loan)

Structure your financing as:

80%

First mortgage (no PMI)

10%

Second mortgage/HELOC

10%

Down payment

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VA Loans

Qualified veterans: no down payment and no PMI, though there is a one-time funding fee.

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USDA Rural Development Loans

Eligible rural properties: no down payment but annual guarantee fees apply.

Is PMI Worth It?

PMI allows you to buy a home sooner rather than waiting to save a full 20% down payment. Consider these factors:

✅ Benefits of Accepting PMI

Buy a home sooner with less money down
Start building equity immediately
Benefit from potential home appreciation
Lock in current interest rates

❌ Drawbacks

Additional monthly expense
No benefit to you (protects lender only)
May be difficult to remove

The decision ultimately depends on your financial situation, local real estate market conditions, and personal risk tolerance.

Private Mortgage Insurance (PMI): What You Need to Know