What Is PMI and Do I Really Need It?
Learn what private mortgage insurance is, exactly how much it costs, and three legitimate ways to avoid paying it on your home purchase.
PMI in Plain English
PMI stands for private mortgage insurance. It is a monthly premium you pay to protect the lender — not you — in the event that you stop making payments and default on your mortgage. The lender requires it when your down payment is less than 20% of the home's purchase price because smaller down payments are considered higher risk.
Think of it from the lender's perspective. If you buy a $300,000 home with only 3% down, you own just $9,000 worth of equity. If you default and the lender has to foreclose and sell the home, any loss in sale price comes out of their pocket. PMI is how lenders protect themselves against that risk when buyers have minimal equity.
PMI is not the same as homeowners insurance, which protects your belongings and the structure of your home. PMI specifically protects the lender. You pay for it, but you receive no direct benefit from it. This is why avoiding it is almost always worthwhile if you have the means to do so.
How Much PMI Actually Costs
PMI typically costs between 0.5% and 1.5% of the original loan amount per year, divided into monthly payments. On a $250,000 loan, that is roughly $1,250 to $3,750 per year, or $104 to $313 per month added to your mortgage payment.
The exact rate depends on your credit score, loan type, down payment size, and the insurer the lender uses. Higher credit scores generally mean lower PMI rates. A down payment of 15% typically means lower PMI than a 5% down payment, even though both are under the 20% threshold.
Over five years, PMI on a $250,000 loan could cost you $6,000 to $18,000. That money builds no equity and has no tax benefits in most situations. It is a pure cost of having less equity in the home, which is why reaching 20% equity and eliminating PMI is often a significant financial goal for homeowners.
Three Ways to Avoid PMI
The most straightforward way is to save a 20% down payment before buying. On a $300,000 home that is $60,000. This requires patience and discipline, but it eliminates PMI entirely from the start and also typically qualifies you for better interest rates.
A piggyback loan, sometimes called an 80-10-10, is a second option. You take an 80% first mortgage, a 10% second mortgage or home equity line, and put 10% down. This structure keeps the first mortgage below the 80% threshold that triggers PMI. The second loan typically has a higher interest rate than the first, but the total cost is often less than PMI.
Some lenders offer lender-paid PMI, where they cover the insurance cost in exchange for a slightly higher interest rate on your loan. This eliminates the visible monthly PMI charge, but you pay for it through a higher rate over the full life of the loan. Whether this saves money depends on how long you stay in the home and the specific rates offered.
When PMI Might Be Worth It
PMI is not always the wrong choice. If home prices in your area are rising rapidly, buying now with a smaller down payment and paying PMI may cost less in the long run than waiting years to save 20% while prices climb out of reach.
Also consider the opportunity cost of tying up a large down payment in home equity. If you have $60,000 saved and the choice is using all of it for a 20% down payment or putting 10% down and investing the other $30,000, the invested amount at historical market returns might outpace the cost of PMI over the same period.
PMI also goes away automatically once your loan balance drops to 78% of the original appraised value, under the federal Homeowners Protection Act. You can also request cancellation at 80% LTV. So PMI is a temporary cost, not a permanent one — which makes it more tolerable as a short-term solution.