Private mortgage insurance (PMI) is insurance that protects the lender if you don’t make payments on your home loan. If you’re putting less than 20% down on a home and taking out a conventional loan, you generally have to pay this cost at closing or as part of your monthly mortgage payments.
What is PMI?
PMI is a form of mortgage insurance that applies to conventional loans. If you buy a home with a conventional loan and your down payment is less than 20% of the home’s value, buying PMI is mandatory. Lenders also require you to buy PMI if you’re refinancing with a conventional loan and you have less than 20% equity in the home.
Lenders set up your PMI with private insurance companies that offer it, and the cost is listed on your loan estimate and closing disclosure.
PMI is there to protect the lender, not the borrower. If you don’t make your mortgage payments, the lender can recoup some of the money they’re owed from the insurer. But you’re not protected from late payment fines or foreclosure.
Indirectly, PMI may be helpful to borrowers because it offers a path to homeownership for those who don’t have the funds for a large down payment.
“In the event of a loan defaulting, a lender gets some of their money back in that situation, but the benefit is borrowers no longer have to put 20% down when buying a home. So it’s a very important tool in the industry to help people get into homes,” says Daniel Iglesia, director of mortgage sales at Georgia’s Own Credit Union.
When do you need to pay PMI?
You need to pay PMI when you buy a home with a conventional loan and make a down payment of less than 20%, or when you refinance with a conventional loan and your equity is below 20%.
PMI doesn’t apply to government-backed loans. Instead, you pay other types of mortgage insurance on loans guaranteed by the FHA, USDA or VA:
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FHA loans. You have to pay both an upfront and monthly mortgage insurance premium on an FHA loan. The monthly mortgage insurance premium generally stays in place for the life of the loan if your down payment was less than 10%.
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USDA loans. You pay an upfront guarantee fee and an annual guarantee fee on a USDA guaranteed loan, which serve a similar purpose to mortgage insurance. These fees can’t be removed. You don’t owe mortgage insurance on a USDA direct loan.
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VA loans. You pay a funding fee that varies by down payment size and whether it’s your first time using the VA loan benefit. You may not owe the fee if you qualify for an exemption, such as if you receive VA compensation for a disability related to your service.
How much does PMI cost?
Dozens of factors can influence your PMI rate, but the two most important ones are your loan-to-value ratio and your credit score.
Your loan-to-value ratio is your loan amount expressed as a percentage of your home’s value. A lower down payment results in a higher loan-to-value ratio, which means more risk for the lender. Thus, a larger down payment can help you get a better rate on PMI.
To see the impact of down payment size on your rate, take a look at an example. Suppose you buy a $400,000 home with a 30-year loan and a 7% interest rate. Your PMI premium can drop dramatically if you put more money down, based on calculations from Freddie Mac.
Lenders and private mortgage insurers also see a borrower with a better credit score as less risky, and PMI rates reflect that.
“Somebody who has a 780 credit score is going to have a lot lower PMI than somebody who has a 680 credit score. And that could make a world of difference in the amount that you’re charged,” Iglesia says.
How long do you have to pay PMI?
You don’t have to pay monthly PMI premiums over the entire life of your home loan. You can request to get rid of PMI once you’ve built enough equity, or it will be removed later by the lender.
You can stop paying monthly PMI premiums at the following points in your loan’s timeline.
When your principal balance reaches 80%
You can write to your loan servicer and ask to remove PMI when your loan balance goes down to 80% of the purchase price or the appraised value of your home, whichever is lower. Your PMI disclosure form shows the date that should happen based on your payment schedule. If you think your home’s value has gone up and your equity has reached 20% sooner than expected, you can get an appraisal to show your servicer.
You must have a history of on-time payments and no home equity loans or other liens on the property for the servicer to agree to your request. And the servicer might require a new appraisal if you haven’t had one recently.
When your principal balance reaches 78% (automatic cancellation)
If you don’t request PMI removal or don’t qualify for it when your loan balance reaches 80% of your home’s value, then the servicer must cancel PMI when your loan balance falls to 78%. You must be making payments on time to get PMI removed, so automatic cancellation could be delayed if you’re late on a payment.
At the halfway point of your loan term (automatic cancellation)
Even if your loan balance is still above 78%, your servicer must cancel PMI at the halfway point of your loan term, as long as you are current on payments. For a 30-year loan, PMI removal is triggered once 15 years have gone by. Typically, you can remove PMI sooner based on equity, but if your loan is in forbearance for a time, you might have to wait until the midpoint of your loan term to stop paying PMI.
How do you avoid PMI?
If you don’t want to pay PMI, you have a few choices.
First, you can make a 20% down payment. This removes the need for PMI, but the downside is you need to have a significant amount of cash on hand. You might have to delay buying a home while you save up enough money.
Second, you can look for a lender that offers lender-paid PMI. With this option, you aren’t paying the PMI premiums yourself, but the lender will typically charge you a higher interest rate to cover the cost. Thus, you end up paying for it indirectly.
Finally, you can take out a piggyback loan. Instead of making a down payment of 20%, you make a smaller down payment and use a second mortgage to make up the difference. For example, if your down payment is 10%, you could take out a piggyback loan worth 10% of your home’s value, leaving your first mortgage at 80%. You avoid paying PMI on your first mortgage, but the interest rate on the piggyback loan will likely be higher. This loan structure can also make refinancing more complicated.
Types of PMI
PMI can be paid for by different parties to the transaction and can be structured in different ways.
The borrower can pay PMI themselves. Alternatively, the lender can pay PMI, but they generally charge a higher interest rate for doing so. Or, the seller might cover some of the cost of PMI as a concession.
PMI can be paid monthly or in a lump sum upfront, or the cost can be split between monthly and upfront payments.
Monthly premiums
PMI can be included in your monthly mortgage bill. Most borrowers pay PMI this way, and it has the advantage that your PMI can be removed once you have enough equity.
One upfront premium
You can pay all your PMI in a lump sum when you close on your loan. This may make sense if you intend to hold onto your mortgage for a long time, but you may not get the money back if you refinance or sell your home.
Split premiums
You can pay part of your PMI upfront at closing and the rest in monthly premiums. This option gets some of your PMI taken care of from the start, without requiring you to bring cash for the full premium to closing.
PMI vs. homeowners insurance: What’s the difference?
PMI and homeowners insurance serve different purposes. PMI protects your lender in case you don’t make your mortgage payments. Homeowners insurance pays for repairs if your home is damaged by events like storms and fires, and it also pays to replace your possessions if they’re damaged or stolen.
Lenders require PMI only on conventional loans when your down payment or equity in the home is less than 20% of what the home is worth. Lenders typically require homeowners insurance on all home loans so that the property that’s securing the loan doesn’t lose its value.
Private mortgage insurance FAQs
What does private mortgage insurance do?
Private mortgage insurance pays your lender if you fail to make payments on your mortgage. You still face all the consequences of missed payments, such as late fees and ultimately foreclosure. Private mortgage insurance is there to protect the lender, not to protect you.
Is PMI the same as mortgage insurance?
PMI is one type of mortgage insurance, but there are others. For example, on an FHA loan you pay a mortgage insurance premium to the FHA rather than to a private insurance company.
Is PMI mandatory?
PMI is mandatory if you take out a conventional loan and your down payment is less than 20%.
How much is PMI on a $300,000 mortgage?
PMI on a $300,000 30-year mortgage with a 7% interest rate may be about $274 if you’re putting 5% down, $176 if you’re putting 10% down or $71 if you’re putting 15% down, according to calculations by Freddie Mac.
How much does PMI cost per month?
Calculations from Freddie Mac show that PMI can cost about $365 per month on a $400,000 30-year mortgage with a 7% interest rate, assuming you’re making a 5% down payment. PMI rates depend on your down payment size and credit score, among other factors.
Does PMI go away after 20% equity?
You can ask your loan servicer to remove PMI once you have 20% equity in your home, provided you are making your payments as agreed. The servicer will check that you don’t have any second mortgages or other liens on the property, and a new appraisal might be required.
Is mortgage insurance required on every loan?
Mortgage insurance is not required on every loan. If you take out a conventional loan and make a down payment of at least 20%, you do not have to pay PMI.
What’s the difference between PMI and homeowners insurance?
PMI protects the lender if you don’t make your mortgage payments as agreed. Homeowners insurance protects you from events like storm damage, fire damage or theft. Homeowners insurance also protects the lender’s financial interest in your property.