One of the most misunderstood costs in homebuying is PMI. People hear “mortgage insurance” and think it protects them. It doesn’t. It protects the lender.
Here’s the straight story.
What PMI Is (And Isn’t)
Private Mortgage Insurance (PMI) is insurance you pay for on a conventional mortgage when your down payment is less than 20%. Its purpose is to protect the lender if you default on the loan.
What it covers: If a borrower stops paying and the lender forecloses and sells the home at a loss, PMI covers part of the lender’s loss. Not you. The lender.
What it doesn’t cover: Your home, your equity, or your finances. If your house is damaged, PMI doesn’t pay (that’s homeowners insurance). If you lose your job, PMI doesn’t help.
That’s why PMI is a cost many buyers try to minimize.
How Much Does PMI Cost?
PMI typically runs roughly 0.5% to 1.5% of your loan amount per year, depending on:
- Your loan-to-value ratio (LTV). The smaller your down payment, the higher your PMI. 5% down costs more than 15% down.
- Your credit score. Higher scores get better PMI pricing.
- The loan type and term.
- The insurer and lender. Pricing varies, so compare quotes.
Example on a $345,000 home with 10% down:
- Loan amount: $310,500
- At 0.5% a year: about $1,553 a year, or $129 a month
- At 1.5% a year: about $4,658 a year, or $388 a month
Your lender’s Loan Estimate will show your actual PMI.
How Long Do You Pay PMI?
On a conventional loan, PMI isn’t forever. Under the federal Homeowners Protection Act:
- You can request cancellation once your loan balance reaches 80% of the home’s original value (the lower of the purchase price or appraised value), as long as you’re current with a good payment history, have no second mortgage on the home, and can show the value has not dropped if your servicer asks. Put the request in writing.
- It ends automatically when your balance is scheduled to reach 78% of the original value, as long as you are current on payments.
You can get there faster by:
- Making extra principal payments.
- Home appreciation. Some lenders will remove PMI based on a new appraisal if your home has gained value. Lender rules vary, so ask what they require.
FHA Mortgage Insurance Is Different
FHA loans allow 3.5% down, but they have their own mortgage insurance, called MIP:
- An upfront premium of 1.75% of the loan amount, usually rolled into the loan
- An annual premium, paid monthly
- With less than 10% down, the annual MIP lasts for the life of the loan
- With 10% or more down, it lasts 11 years
The usual way to get rid of FHA MIP early is to refinance into a conventional loan once you have enough equity.
VA loans have no monthly mortgage insurance (they have a one-time funding fee instead). USDA loans have no PMI but charge an upfront and annual guarantee fee.
How to Avoid PMI
Option 1: Put down 20%
- On a $345K home, that’s $69,000
- The cleanest approach
- Takes the longest to save
Option 2: Use a VA loan if you’re eligible
- 0% down, no monthly mortgage insurance
- One-time funding fee (some borrowers are exempt)
Option 3: Piggyback second mortgage (less common)
- For example, an 80% first mortgage, a 10% second mortgage, and 10% down
- No PMI on the first mortgage, but the second loan usually has a higher rate
- Fewer lenders offer these
Option 4: Accept PMI now and remove it later
- Often the most practical route
- Track your balance and request cancellation at 80%
Should You Rush to Remove PMI?
Not always. Extra principal payments do two things: they reduce your interest cost and they get you to 80% sooner, which eliminates PMI.
But money you send to your mortgage is hard to get back out. Before you prepay, make sure you have:
- An emergency fund
- No higher-interest debt you should pay first
- A clear picture of how much PMI you’d actually save
If those boxes are checked, prepaying to drop PMI can be a solid move. If not, normal payments will still get you there.
Key Takeaways
- PMI protects the lender, not you, and typically costs roughly 0.5% to 1.5% of the loan per year
- On a $345K home with 10% down, that’s about $129 to $388 a month
- On a conventional loan, request cancellation at 80% of original value; it ends automatically at 78% if you are current
- FHA MIP lasts for the life of the loan with less than 10% down
- VA loans have no monthly mortgage insurance; USDA loans have guarantee fees instead
- Prepay to remove PMI only after your emergency fund is in place
Have Questions About Your Specific Situation?
PMI math depends on your down payment, credit score, and loan type. Let’s talk about what it means for your purchase. Call me at (540) 246-9067.
Frequently Asked Questions
What exactly is PMI?
PMI is mortgage insurance that protects the lender if you default on the loan. It's usually required on conventional mortgages when you put down less than 20%. You pay for insurance that benefits the lender, not you, which is why many buyers want to avoid it or remove it as soon as they can.
How much does PMI cost?
It typically runs roughly 0.5% to 1.5% of the loan amount per year, paid monthly. For example, on a $310,500 loan (10% down on $345,000), that range works out to about $129 to $388 a month. Your actual quote depends on your down payment, credit score, and lender.
How long do I pay PMI?
On a conventional loan, you can ask your lender in writing to cancel PMI once your balance reaches 80% of the home's original value, as long as you are current with a good payment history, have no second mortgage on the home, and the value has not dropped (the servicer may ask for proof). It ends automatically when your balance is scheduled to reach 78%, provided you are current on payments. Some lenders will also remove it based on a new appraisal if your home has gained value. FHA mortgage insurance is different: with less than 10% down, it lasts for the life of the loan unless you refinance.
Can I avoid PMI?
Yes: put 20% down, use a VA loan if you're eligible (no monthly mortgage insurance), or ask about a piggyback second mortgage (less common). USDA loans have no PMI but do charge guarantee fees. Many buyers accept PMI at first and remove it later.
Is PMI tax deductible?
The rules on deducting mortgage insurance premiums have changed several times in recent years. Ask your tax preparer what applies for the year you're filing.
Should I pay down my mortgage faster to remove PMI?
It depends. Extra principal payments get you to the 80% mark sooner and eliminate the PMI cost, but that money is no longer available for emergencies or other goals. Compare the PMI you'd save with what else you'd do with the cash.