What is PMI on a Mortgage? A 2024 Guide to Costs and How to Remove It

Private Mortgage Insurance (PMI) is a mandatory cost for most homebuyers using a conventional loan with a down payment of less than 20%. While it increases your monthly payment, PMI is not permanent and can be canceled once you build sufficient equity. This guide explains how PMI works, its typical costs, and the specific steps you can take to avoid or remove it, helping you make an informed financial decision.

What is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is a type of insurance that protects the lender—not the homeowner—if the borrower defaults on the loan. Lenders require PMI on conventional mortgages when the homebuyer’s down payment is less than 20% of the home’s purchase price. This requirement exists because a smaller down payment represents a higher risk for the lender. While PMI adds to your monthly housing expense, it enables buyers to purchase a home without waiting years to save a full 20% down payment.

How Much Does PMI Typically Cost?

The annual cost of PMI generally ranges from 0.3% to 1.5% of your original loan amount. This annual premium is divided into monthly installments added to your mortgage payment. The exact rate depends on factors like your credit score, loan-to-value ratio (LTV), and the loan amount.

For example, on a $300,000 loan, your annual PMI cost could be between $900 and $4,500, translating to a monthly cost of $75 to $375.

Note: Improving your credit score can often help you secure a lower PMI rate.

When and How Can You Remove PMI?

You are not stuck with PMI for the entire life of your loan. Based on our experience assessment, there are two primary paths to removal:

1. Request Cancellation at 20% Equity: You can formally request your servicer to cancel PMI once you reach 20% equity based on your home’s original purchase price. Your mortgage must be current, and you may need to pay for a new appraisal to confirm the value.
2. Automatic Termination at 22% Equity: For most mortgages, the servicer is legally required to automatically terminate PMI once you reach 22% equity through regular payments, provided your account is in good standing.

A third option is to refinance your mortgage if your home’s value has increased significantly, allowing you to reach an 80% LTV ratio with the new loan and eliminate PMI.

What Are the Strategies to Avoid PMI?

If you want to bypass PMI altogether, consider these strategies:

• Make a 20% Down Payment: The most straightforward method is to save for a down payment of 20% or more.
• Utilize a Piggyback Loan: This strategy involves taking out a second mortgage simultaneously with your first mortgage to cover part of the down payment, effectively allowing you to make a 20% combined down payment and avoid PMI.
• Explore VA Loans: Eligible veterans, active-duty service members, and surviving spouses can obtain a VA loan, which does not require any down payment or mortgage insurance.
• Consider Lender-Paid PMI (LPMI): With this option, the lender pays the insurance premium upfront in exchange for a slightly higher interest rate on your loan. While this avoids a separate monthly PMI fee, the higher rate lasts for the entire loan term, and removing it would require refinancing.

Key Takeaways for Homebuyers

Understanding PMI is critical for accurate homebuying budgeting. PMI is a temporary fee that enables homeownership with a smaller down payment. To manage this cost effectively, focus on improving your credit score before applying for a mortgage and have a clear plan for building equity to request cancellation. Weigh the short-term cost of PMI against the long-term benefit of building equity and potential home appreciation in your local market.