What Is Private Mortgage Insurance (PMI)?

Greg Powell
Aug 6
3 min read

If you're thinking about buying a home—especially for the first time—you may have heard the term PMI, or Private Mortgage Insurance. It often comes up when talking about down payments and monthly costs. But what exactly is PMI, and how does it affect your mortgage?

Let’s break it down.

What Is PMI?

Private Mortgage Insurance (PMI) is a type of insurance that protects the lender, not you, if you stop making payments on your mortgage. It’s typically required when a buyer puts down less than 20% of the home’s purchase price.

While PMI doesn’t benefit you directly, it helps you qualify for a mortgage with a lower down payment—often as little as 3% to 5%.

Why Do Lenders Require It?

The smaller your down payment, the higher the risk for the lender. PMI reduces that risk by guaranteeing the lender will recover some of their money if you default on the loan. In return, they’re more willing to offer you financing, even with a lower down payment.

How Much Does PMI Cost?

PMI typically costs 0.5% to 1.5% of your loan amount per year, paid as part of your monthly mortgage payment.

For example:

Loan amount: $300,000
PMI at 1%: $3,000/year or $250/month

Your credit score, loan type, and down payment amount all influence how much you'll pay.

How Long Do I Have to Pay PMI?

You won’t have to pay PMI forever. Here are the ways it can go away:

1. Automatic Cancellation

Once you’ve paid your mortgage down to 78% of the home’s original value, your lender is required to automatically cancel PMI.

2. Request Cancellation Sooner

You can request PMI removal when your loan balance reaches 80% of your home’s original value, either through payments or appreciation.

3. Refinancing

If your home has gained value, refinancing might help you eliminate PMI early—if the new loan amount is less than 80% of your home’s current appraised value.

How Can I Avoid PMI?

Put down 20% or more when you buy a home.
Look into lender-paid PMI (though this may come with a higher interest rate).
Consider a VA loan (for veterans/military), which requires no PMI.
Explore piggyback loans, where you combine a first and second mortgage to avoid hitting the 80% threshold.

Is PMI Bad?

Not necessarily. PMI adds to your monthly cost, yes—but it opens the door to homeownership for many who might not have 20% saved. The key is to understand what you're paying for and create a plan to remove it when you're able.

If PMI helps you buy a home sooner and start building equity, it can be worth it. Just make sure to run the numbers, ask your lender how much PMI will cost, and keep an eye on your equity so you can ditch PMI as soon as you're eligible.

FAQs

1. What is PMI?

PMI stands for Private Mortgage Insurance, a type of insurance that protects the lender if you stop making your mortgage payments. It's usually required when your down payment is less than 20%.

2. Who does PMI protect?

PMI protects the lender, not the buyer. It ensures the lender is covered if the borrower defaults on the loan.

3. How much does PMI cost?

PMI typically costs between 0.5% and 1.5% of the loan amount annually. This is paid monthly as part of your mortgage payment.

4. Can I avoid PMI?

Yes. You can avoid PMI by:

Putting at least 20% down
Choosing a VA loan (for veterans and active military)
Using a piggyback loan (80/10/10 structure)
Looking into lender-paid PMI options (though this may increase your interest rate)

5. How do I get rid of PMI?

PMI can be removed in a few ways:

Automatic removal at 78% loan-to-value (LTV) based on the original loan.
Request cancellation at 80% LTV if you’ve made extra payments or your home has increased in value.
Refinance once you reach 20% equity through home appreciation or payoff.

6. Is PMI tax-deductible?

Sometimes. PMI has been tax-deductible in the past, but it depends on current tax laws and your income. Talk to a tax professional to see if you qualify.

7. Does PMI cover me if I lose my job or can’t pay?

No. PMI only protects the lender, not the borrower. If you’re concerned about job loss, consider mortgage protection insurance or an emergency fund.