Private Mortgage Insurance (PMI): What It Is and How It Affects Your Monthly Payment

What is private mortgage insurance and why is it required?

Private mortgage insurance, commonly called PMI, is a type of insurance that protects the lender—not you—if you stop making payments on a conventional mortgage. It's typically required when your down payment is less than 20% of the home's value. That lower down payment means the lender is taking on more risk, so PMI offsets that risk.

PMI is not the same as homeowners insurance, which protects you and your property. PMI only covers the lender's potential loss if you default.

• PMI is required on conventional loans with a down payment under 20%.
• It protects the lender, not the borrower.
• PMI is not homeowners insurance.

Sources: Fannie Mae, Experian, AmeriSave

How PMI is calculated: rates and factors

PMI is expressed as an annual percentage of the original loan amount, and that percentage is applied to your loan balance to determine the annual premium, which is typically divided by 12 and added to your monthly mortgage payment. The annual cost usually falls between 0.46% and 1.5% of the loan amount.

The exact rate you pay depends on several factors, including your down payment amount, credit score, loan amount, and the type of mortgage. Generally, a higher credit score leads to a lower PMI rate. For example, according to data from the Urban Institute's Housing Finance Policy Center, average annual rates range from 0.46% for borrowers with credit scores of 760 or higher to 1.50% for those with scores between 620 and 639.

Here's a sample of how those rates translate into a monthly cost for a $300,000 loan:

Sources: NerdWallet, Experian

PMI vs. FHA mortgage insurance premium (MIP): key differences

While PMI applies to conventional loans, FHA loans have their own mortgage insurance premium, called MIP. FHA loans require MIP regardless of your down payment amount—even if you put down 20% or more. MIP includes an upfront premium of 1.75% of the base loan amount at closing, plus an annual premium that typically ranges from 0.15% to 0.75% of the loan amount.

A major difference is cancellation. With PMI, you can request cancellation once your loan balance reaches 80% of the original purchase price (i.e., you have 20% equity). For FHA loans with a down payment of less than 10%, MIP may be required for the life of the loan—you cannot cancel it just by reaching 20% equity. That's a critical distinction to understand when choosing between loan types.

• PMI is for conventional loans; MIP is for FHA loans.
• FHA MIP requires an upfront premium of 1.75% plus an annual premium.
• PMI can often be canceled at 20% equity; FHA MIP may stay for the loan's life if your down payment was under 10%.

Sources: Fannie Mae, Experian, AmeriSave, Investopedia

When can PMI be canceled? The 20% equity rule and federal protections

You can request PMI cancellation once your loan balance drops to 80% of the original purchase price—in other words, when you have at least 20% equity in your home. This can happen through regular payments, extra payments, or an increase in home value (though you'll likely need an appraisal to verify).

The Homeowners Protection Act also provides a safety net: your lender must automatically cancel PMI when your loan balance reaches 78% of the original value, provided your payments are current. This automatic termination is a federal requirement.

The rules can vary slightly by loan type and lender, so it's important to ask your servicer about the exact process.

• Request cancellation at 80% loan-to-value (LTV).
• Automatic cancellation at 78% LTV under the Homeowners Protection Act.
• Keep your payments current to qualify for automatic termination.

Sources: Fannie Mae, Experian, AmeriSave, Intuit Credit Karma

How to avoid PMI: strategies to consider

Each strategy has trade-offs. For example, piggyback loans can help you avoid PMI, but you may end up with a higher overall interest rate or more complexity. It's important to compare the total costs of each option before deciding.

• Larger down payment: The simplest way—saving up to 20% eliminates the need for PMI.
• Piggyback loan (also called an 80-10-10 loan): Use a second mortgage to cover part of the down payment, keeping your primary loan at 80% LTV. This can avoid PMI but may come with a higher interest rate on the second loan.
• Lender-paid PMI (LPMI): The lender pays the PMI premium for you in exchange for a higher interest rate on your mortgage. Your monthly payment may be lower than with borrower-paid PMI, but you'll pay more interest over time, and you cannot cancel LPMI separately—it's built into the loan.
• Single-premium PMI: Pay the entire PMI premium upfront at closing. This lowers your monthly payment but requires more cash at closing.
• Split-premium PMI: Combine an upfront payment with smaller monthly premiums—another way to reduce monthly costs.

Sources: AmeriSave, Investopedia