What is PMI? A Beginner’s Guide to Private Mortgage Insurance

Buying a home is a big milestone, and whether you’re a first-time buyer or just getting back into the market, you’ll quickly realize there’s a whole new language to learn—escrow, appraisals, contingencies… and then there’s PMI.

So, what is PMI? Do you need it? How much does it cost? And most importantly—how can you get rid of it?

In this guide, we’ll break it all down in plain English, so you can approach your home purchase with confidence—and avoid being blindsided by those three little letters.

What is PMI?

PMI stands for Private Mortgage Insurance, and it’s exactly what it sounds like—insurance that protects the lender (not you) in case you stop making your mortgage payments.

Let’s say you’re buying a home but don’t have a 20% down payment. Your lender sees that as a bigger risk. So, to help offset that risk, they require you to pay for PMI. It’s their backup plan—just in case things go south.

Think of PMI as the lender’s version of an “uh-oh” fund. You, the buyer, are footing the bill, but the lender is the one who benefits if something goes wrong.

When Do You Have to Pay PMI?

PMI usually comes into play when you’re using a conventional loan and putting down less than 20% of the home’s purchase price.

So, if you’re buying a $600,000 home and only putting down $30,000 (which is 5%), you’ll almost definitely be required to pay PMI.

Not using a conventional loan? Different types of mortgages handle this differently:

• FHA loans have their own version of PMI called MIP (Mortgage Insurance Premium), which is structured a bit differently but serves a similar purpose.
• VA loans (for qualified veterans and active-duty military) don’t require PMI at all—one of the many perks of VA financing.
• USDA loans also don’t require PMI, but they do have an annual guarantee fee that functions similarly.

But if you’re in the conventional loan world, and you don’t hit that 20% down payment mark—PMI is coming along for the ride.

How Much Does PMI Cost?

PMI isn’t a flat fee—it’s usually calculated as a percentage of your total loan amount, and it can range from 0.3% to 1.5% annually. The exact cost depends on several factors:

• Your loan-to-value ratio (LTV) – the smaller your down payment, the higher your LTV, and usually, the higher your PMI.
• Your credit score – better credit can help you score a lower PMI rate.
• The type of loan you’re using.
• Whether you’re paying PMI monthly or all upfront (yes, there are options—more on that shortly).

Let’s break that down with a real-world example:

You’re buying a $600,000 home and putting 10% down, which means you’re financing $540,000. If your PMI is 0.5%, that’s $2,700 per year—or around $225 per month, added to your mortgage payment.

Now multiply that over a few years, and it adds up—quickly.

How is PMI Paid?

There are four common ways PMI can be paid:

• Monthly Premiums – This is the most common method. Your PMI is included in your monthly mortgage payment. It’s simple, predictable, and easy to budget for.
• Upfront Premium – You can pay the entire PMI premium upfront at closing. This avoids a higher monthly payment, but it also means shelling out more cash at the start.
• Split Premium – This is a hybrid option where you pay part of the PMI upfront and the rest monthly. It can be a good compromise if you don’t want to drain your savings but still want to lower your monthly costs.
• Lender-Paid PMI – In this case, your lender “covers” the PMI, but it usually results in a slightly higher interest rate. It might sound nice, but you’ll likely pay more over time.

How Can You Get Rid of PMI?

The good news is PMI doesn’t have to be forever—you can get rid of it once you build enough equity in your home.

Here’s how:

• Automatic Cancellation: Under federal law, your lender is required to automatically cancel PMI when your loan balance reaches 78% of the original home value (that’s a 22% equity stake), assuming you’re current on your payments.
• Request Early Cancellation: Once you hit 20% equity, either through paying down your mortgage or because your home has increased in value, you can ask your lender to remove PMI. You may need to pay for an appraisal to prove your home is worth more than what you originally paid.
• Refinance: If your home’s value has gone up significantly and your loan is in good standing, you could refinance into a new loan without PMI. This also makes sense if you can lock in a lower interest rate.

Here’s a tip: lenders aren’t going to remind you that you’re eligible to cancel PMI. You’ve got to be proactive, ask questions, and keep an eye on your equity.

Is PMI a Bad Thing?

Not necessarily. PMI gets a bad rap because it’s an added cost that doesn’t directly benefit the buyer. But it also makes homeownership more accessible for people who don’t have 20% to put down—and that’s a big deal.

Let’s say it would take you another five years to save a 20% down payment. During that time, home prices may continue to rise, and interest rates could go up. Paying PMI now might actually save you money in the long run—by allowing you to buy sooner and start building equity.

So while PMI isn’t fun, it’s not always a dealbreaker. It’s just one piece of the puzzle.

Tips for Managing or Avoiding PMI

If you want to avoid PMI altogether, here are a few strategies:

• Aim for a 20% down payment – Easier said than done, but it will eliminate PMI entirely on conventional loans.
• Look into lender-paid PMI options – Just be sure to calculate the long-term interest cost.
• Consider a piggyback loan – Also known as an 80-10-10 loan, this involves getting a second loan to cover part of your down payment.
• Improve your credit score – The better your credit, the lower your PMI rate could be.
• Keep tabs on your home value – If the market’s hot and your home appreciates quickly, you may be able to cancel PMI sooner than you think.

Final Thoughts: PMI is Manageable

PMI might feel like one of those annoying “fine print” costs of buying a home—but it doesn’t have to be a mystery or a money pit. It’s just one of the tools lenders use to manage risk, and understanding how it works puts you in control.

If you’re a first-time homebuyer, don’t let PMI scare you away from buying a home. Yes, it’s an extra expense—but it also opens the door to owning a home sooner, instead of waiting years to hit that 20% down mark.

The key is to go in with your eyes open. Know when you’ll have to pay PMI, understand how much it will cost, and have a plan to cancel it when the time is right.