What Is PMI? How Private Mortgage Insurance Affects Your Home Purchase
Buying a home with less than 20% down? Then you need to know about Private Mortgage Insurance (PMI). Many buyers don’t realize that this extra cost could add hundreds to their monthly mortgage payment—but the good news is, PMI isn’t forever. In this guide, we’ll break down what PMI is, why it exists, how much it costs, and how you can remove it sooner.
What Is Private Mortgage Insurance (PMI)?
PMI is a type of insurance required by lenders when a borrower puts less than 20% down on a conventional loan. It protects the lender if the borrower stops making payments—but the borrower is responsible for paying the premium.
Lenders view smaller down payments as a higher risk, so PMI helps offset that risk. However, for buyers, PMI means an extra monthly cost on top of their mortgage payment.
How Much Does PMI Cost?
The cost of PMI depends on several factors, including:
Loan amount – The higher your loan, the more PMI costs.
Down payment – A smaller down payment means a higher PMI rate.
Credit score – Borrowers with lower credit scores pay more for PMI.
PMI typically costs 0.5% to 2% of the loan amount per year. For example, on a $300,000 loan, PMI could add $125 to $500 per month to your mortgage.
How to Remove PMI
The good news is that PMI isn’t permanent. There are several ways to remove it:
Automatic Cancellation – PMI is automatically removed when your loan balance reaches 78% of the home’s original value—as long as your payments are up to date.
Borrower-Initiated Removal – You can request to cancel PMI once your loan balance reaches 80% of the home’s value.
Home Appreciation – If your home’s value has increased, a new appraisal might show you’ve reached 80% equity, allowing you to remove PMI early.
Refinancing – If interest rates are favorable, refinancing could help you eliminate PMI while lowering your mortgage payment.
Is PMI Worth It?
While PMI is an added cost, it allows buyers to purchase a home sooner rather than waiting years to save 20%. In many cases, the benefits of homeownership outweigh the cost of PMI, especially if home values are rising.
Need Help Navigating the Home Buying Process?
Understanding PMI is just one part of getting the best deal on a home. If you're thinking about buying and want expert guidance, I’m here to help. Let’s find the right strategy to get you into a home without unnecessary costs. Contact me today to get started!