Some advertisements and offers on this page are from advertisers who pay us. That may influence which products we write about, but it does not affect what we write about them. Here's an explanation of how we make money and our Advertiser Disclosure.
Private mortgage insurance (PMI) is a type of mortgage insurance for conventional loans that protects the lender in case you default on your mortgage. Home buyers who make a down payment of less than 20% will be required to purchase PMI as a condition of the loan.
Requiring PMI allows mortgage lenders to offer loans to home buyers with limited cash reserves. If you are required to purchase PMI, your mortgage lender will set up the insurance with a private insurer. Here’s more on what you need to know about private mortgage insurance, including how much it costs, how long you have to pay it, and how to avoid it.
In this article:
How much is private mortgage insurance?
Most borrowers pay the added cost of PMI along with their monthly mortgage payment, though some lenders may let you pay it all up-front in some scenarios. According to Freddie Mac, monthly premiums for PMI generally range from $30 to $70 for every $100,000 you borrow. Your exact rate and monthly payment will vary depending on the value of your home, the size of your down payment, and your credit score.
Here’s an example of how much you could expect to pay for PMI premiums depending on the size of your down payment. Assume you are purchasing a $350,000 home with a 30-year mortgage with a fixed rate of 7%.
What factors determine how much I pay in PMI?
There’s no flat fee for PMI. Instead, PMI costs are calculated based on the risk you present to the lender (how likely you are to default on the mortgage) and several factors that are unique to your loan. These include:
-
Your down payment amount: A larger down payment means the lender has to loan you less, which makes the loan less risky. As a result, it will usually equate to a lower PMI cost. If you make a 20% down payment on a conventional loan, you don’t have to pay PMI at all.
-
Your loan amount: The more you borrow, the higher your PMI costs will typically be, as the lender has more to lose if you default. Also, your PMI is usually calculated as a percentage — so a percentage of a larger amount results in a higher insurance payment.
-
Your credit score: A higher credit score indicates you’re responsible with your money and stay current on your debts. This will usually qualify you for lower PMI costs, while a low credit score will do the opposite.
-
The type of mortgage loan you’re using: You’ll usually pay higher PMI costs on adjustable-rate mortgages. This is because the rates and payments on these loans can change often, making it harder for borrowers to stay current on payments.
Your lender should give you an idea of your PMI costs on your Loan Estimate and again in your Closing Disclosure, which you’ll receive no later than three days before closing on your loan.
How long do I have to pay PMI?
The good news about PMI is that you are not locked into it for the entire life of the loan. Below are three ways your PMI may be canceled — which will lower your monthly payment.
When your principal balance reaches 80%
Borrowers have the right to request PMI cancellation once the principal balance remaining on the mortgage has reached 80% of the home’s original value.
The law requires your lender to cancel your PMI upon reaching the 80% principal balance as long as you meet these requirements:
-
You request the cancellation of PMI in writing
-
You are current on your mortgage payments and have maintained a history of on-time payments
-
You do not have any second mortgages on the property
-
Your home’s current value is not less than its original value
When your principal balance reaches 78%
Though you must specifically request to cancel your PMI at the 80% principal balance milestone, your lender will automatically cancel your private mortgage insurance once your mortgage principal balance reaches 78% of the original home value.
This cancellation is automatic, but it may not go through if you are not current on your mortgage payments.
When you are halfway through your loan term
Reaching the halfway point of your mortgage repayment term — whether or not your principal balance has reached 78% of the original home value — will also automatically trigger the cancellation of your PMI. For a 30-year mortgage, this means your PMI will be canceled when you reach year 15, even if you still owe more than 78% of the home’s value.
Borrowers must be current on their mortgage payments for this automatic cancellation to occur.
How do I avoid PMI?
The simplest way to avoid paying PMI is to put down at least 20% on a conventional loan, which would give you that 80% loan-to-value ratio (LTV ratio) your lender is looking for.
However, if you are not able to afford a 20% down payment, here are some other ways to avoid paying PMI:
-
Piggyback mortgage: With a piggyback loan, you use a second loan to cover part of the down payment you can’t make out of pocket. For example, you may put down 10% of the home’s price, take a conventional mortgage for 80%, and add a second mortgage, called a piggyback mortgage, for the remaining 10%. The piggyback mortgage will usually be a home equity loan or home equity line of credit, and it will have a higher interest rate than the primary mortgage, it will allow you to avoid PMI on your primary loan. You’ll need to run the numbers to see if this will work in your financial favor over the long haul.
-
Lender-paid mortgage insurance: Some lenders will cover the cost of your private mortgage insurance in exchange for a higher interest rate. We’ll go more into this below.
Yahoo Finance tip: While you won't pay private mortgage insurance on any government-backed loans, FHA loans charge their own mortgage insurance, the USDA charges an up-front and ongoing fee, and the VA charges an up-front fee. With FHA loans, most borrowers cannot cancel mortgage insurance without refinancing into a different loan type.
Types of PMI
There are several types of PMI you might encounter when you buy a home. These include:
Borrower-paid PMI
This is PMI that you’ll pay as the borrower. Often, you’ll pay this monthly as part of your mortgage payment. This is a good option to minimize your closing costs and spread out your PMI costs over time.
You can also pay your PMI premium at closing or finance it into your mortgage loan. This is a worthwhile option if you need to minimize your monthly payment or if you’re able to negotiate for the seller or builder to pay this premium (if you’re located in a buyer’s market, for instance).
Lender-paid PMI
Sometimes, the mortgage lender pays for PMI in exchange for charging you an origination fee or higher interest rate. Lender-paid insurance can help minimize your monthly payment and closing costs. Keep in mind that it may result in more long-term interest expenses unless you’re planning to refinance.
Single-premium PMI
Single-premium PMI is paid in a one-time lump sum at closing. This might be the best option if you want the lowest possible monthly mortgage payments and have plenty saved up for closing costs. Again, this could be your best bet in a buyer’s market where you can negotiate for the seller to pay for this premium at closing.
Split-premium PMI
Split-premium PMI arrangements allow you to pay part of your PMI premium up-front (at closing) and part of it via monthly payments spread across your loan term. You may also be able to have one party cover the up-front portion (maybe the lender, for example), while you, the borrower, cover the monthly payments.
Split-premium PMI can help you spread out your PMI costs, paying some in a lump sum at the beginning while also minimizing the amount it adds to your monthly mortgage payment.
Private mortgage insurance FAQs
What does private mortgage insurance do?
Private mortgage insurance, also called PMI, protects your mortgage lender in case you default on your loan. You’ll usually need to pay it if you make a down payment of 20% or less on a conventional mortgage loan.
How much is PMI on a $300,000 mortgage?
The exact cost will depend on your down payment, interest rate, and credit score. On a $300,000 home with a 30-year term, 7% interest rate, and 10% down payment, you’d pay about $176 per month, according to Freddie Mac.
How much does PMI cost?
PMI costs vary based on your home’s value, your down payment, and your credit score. Freddie Mac estimates you’ll pay anywhere from $30 to $70 per month for every $100,000 you borrow.
Does PMI go away after 20%?
You can cancel your PMI after you reach 20% equity in your home, but you’ll have to request it with your lender in writing. Once you reach 22% equity (meaning your loan balance is 78% or less than your home’s value), your lender will cancel PMI automatically.
This article was edited by Laura Grace Tarpley.
