If you are buying a home and putting less than 20% down, you have likely encountered the term PMI. PMI stands for Private Mortgage Insurance. It is a common, but often misunderstood, component of many modern mortgages.

What is PMI?

Private Mortgage Insurance is a type of insurance policy that protects the lender, not you.

Statistically, borrowers who put very little money down are at a higher risk of defaulting on their loan (stopping payments). If you default, the bank has to foreclose and sell the house. If they sell it for less than what you owe, the bank loses money. PMI steps in to cover the bank's losses in that scenario.

Even though the insurance protects the bank, you are the one who has to pay the monthly premium.

How Much Does PMI Cost?

PMI is usually charged as an annual fee, divided by 12, and added to your monthly mortgage payment. The cost varies based on two main factors:

  1. Your Credit Score: Higher credit scores result in lower PMI rates.
  2. Your Down Payment Size: A 15% down payment will have a much lower PMI rate than a 3% down payment.

Generally, PMI costs between 0.3% and 1.5% of your original loan amount per year. On a $300,000 loan, PMI could cost anywhere from $75 to $375 per month.

How to Get Rid of PMI

The good news about conventional PMI is that it is not permanent. Once the lender determines you have sufficient equity in the home (usually 20%), the risk goes down, and PMI can be removed.

  • Automatic Termination: By law, lenders must automatically cancel your PMI on the date your principal balance is scheduled to reach 78% of the original value of your home.
  • Requesting Cancellation: You have the right to request PMI cancellation when your balance reaches 80% of the original value. You must have a good payment history.
  • New Appraisal: If your home has significantly increased in value due to market appreciation or major renovations, you may have reached 20% equity much sooner than scheduled. You can usually pay for a new appraisal to prove the new value and request early PMI removal.

FHA Loans and MIP

It is important to note that FHA loans do not have PMI. Instead, they have MIP (Mortgage Insurance Premium).

Unlike conventional PMI, FHA MIP cannot simply be canceled when you reach 20% equity. For most FHA loans issued today, the MIP remains for the entire life of the loan. The only way to get rid of it is to refinance into a conventional loan once you have 20% equity.

Estimate Your PMI

Use our Mortgage Calculator to estimate your PMI based on different down payment scenarios.