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For many homebuyers, purchasing a property with less than a 20% down payment means facing an additional monthly cost: Private Mortgage Insurance (PMI). PMI is a type of insurance that protects the lender—not the homeowner—in case of loan default. Based on industry data, nearly 40% of homeowners pay this premium, which typically costs $30 to $70 per month for every $100,000 borrowed. This guide explains how PMI is calculated, the factors that determine your rate, and how you can eventually remove it.
Lenders generally require Private Mortgage Insurance (PMI) on a conventional loan when the home buyer’s down payment is less than 20% of the purchase price. This requirement exists because a smaller down payment represents a higher risk for the lender. PMI is not a government program; it is provided by private insurance companies. The premium is added to your monthly mortgage payment and continues until you build sufficient equity in your home, typically reaching a loan-to-value ratio (LTV) of 78% or less. Your LTV is calculated by dividing your loan amount by the home’s appraised value.
Your monthly PMI cost is determined by a specific formula that multiplies your total loan amount by an annual PMI rate, which is then divided by 12. PMI rates usually range from 0.58% to 1.85% annually, depending on your financial profile.
Calculation Formula: (Loan Amount x PMI Rate) / 12 = Monthly PMI Cost
Consider this example for a $300,000 home with a 10% down payment:
This $146.25 would be added to your monthly principal, interest, taxes, and insurance (PITI) payment. The following table illustrates how different loan amounts affect the monthly PMI cost within the typical rate range.
| Loan Amount | Low-End PMI (0.58%) | High-End PMI (1.85%) |
|---|---|---|
| $200,000 | $96.67 | $308.33 |
| $300,000 | $145.00 | $462.50 |
| $400,000 | $193.33 | $616.67 |
| Table: Estimated monthly PMI costs based on loan amount. Your actual rate will vary. |
Insurance providers assess several key factors to set your individual PMI rate. A stronger financial profile can lead to a significantly lower premium.
Loan-to-Value Ratio (LTV): This is a primary factor. A higher LTV ratio, meaning a smaller down payment, results in a higher PMI rate. For example, a 5% down payment (95% LTV) will have a higher rate than a 10% down payment (90% LTV).
Credit Score: Similar to your mortgage interest rate, your credit score heavily influences your PMI rate. A higher FICO score signals lower risk to the insurer and can help you secure a more favorable rate.
Debt-to-Income Ratio (DTI): Your DTI, which is your total monthly debt payments divided by your gross monthly income, demonstrates your ability to manage a new mortgage payment. A lower DTI is generally viewed more favorably.
Loan Type and Term: The structure of your mortgage matters. For instance, a 15-year fixed-rate loan is often considered less risky than a 30-year adjustable-rate mortgage (ARM), which may lead to a slightly lower PMI rate.
Property Type: The insurer may also consider the property itself. A single-family home might be assessed differently than a condominium.
The good news is that PMI is not permanent. Based on our experience assessment, you can typically get PMI removed in one of three ways:
To minimize your PMI costs, focus on improving your credit score before applying and consider making a larger down payment, even if it's below 20%. Once your loan is active, making extra principal payments is the most direct way to build equity and reach the threshold for PMI removal sooner.
