Buying a home is a big milestone, but the process can come with unfamiliar terms. One of them is private mortgage insurance, often called PMI. So, what is private mortgage insurance, and why does it matter? Knowing how it works helps you navigate your mortgage more confidently and avoid surprises down the road.
Defining Private Mortgage Insurance
Private mortgage insurance, or PMI, shields the lender if loan payments stop. It’s how lenders manage risk when buyers offer less than 20 percent down. Without it, many wouldn’t qualify for a mortgage at all.
When Lenders Require It
Lenders usually require PMI when your down payment is less than 20 percent on a conventional mortgage. A lower down payment means more risk for the lender, which is why PMI often becomes part of the deal, especially for first-time buyers or those with limited savings.
Your lender arranges the insurance for you and folds the cost into your monthly mortgage payments. You’ll learn about the insurance terms during the loan closing.
How Much Does PMI Cost?
PMI costs vary based on your financial profile. Lenders consider your credit score, loan amount, and down payment size. While many borrowers pay about 0.5 to 1 percent annually, those with higher risk may pay up to 6 percent.
This amount is typically divided into monthly payments. For example, if your loan is $200,000 and your PMI rate is 1 percent, you’ll pay about $2,000 a year, or roughly $167 each month.
Ways to Pay PMI
There are a few options when it comes to covering PMI:
- Monthly premiums: This is the typical approach where PMI gets bundled into your monthly mortgage bill.
Single premium: You pay the full PMI amount upfront at closing, or it’s added to your loan.
Lender-paid PMI: Your lender handles the insurance, but you’ll pay a higher interest rate over the life of the loan.
When and How PMI Ends
PMI doesn’t last forever. You can ask your lender to cancel PMI when your remaining loan drops to 80 percent of your home’s present market value. If you don’t request it, lenders must cancel it automatically when the balance hits 78 percent of the original purchase price.
It can also end at the halfway point of your loan term, for instance, 15 years into a 30-year mortgage, even if your balance hasn’t dropped to 78 percent.
Make sure to maintain a solid payment history. Lenders won’t approve cancellation if you’ve missed payments or paid late consistently.
How PMI Differs From FHA Mortgage Insurance
It’s important not to confuse PMI with mortgage insurance premium (MIP). PMI is tied to conventional mortgages, while Federal Housing Administration loans require a different type of insurance known as a mortgage insurance premium or MIP.
FHA loans allow lower down payments, often just 3.5 percent, but they require two types of mortgage insurance:
- Upfront mortgage insurance premium (UFMIP): A one-time charge of 1.75 percent of the loan, paid at closing.
- Annual MIP: A recurring cost added to your monthly payments. Rates vary by loan amount and loan-to-value ratio.
Let’s say you get a $200,000 FHA loan with a 10 percent down payment. Your annual mortgage insurance premium might be around $1,000. If your down payment is under 10 percent, you’ll likely pay MIP for the entire loan term. But if you put down at least 10 percent, the premium usually ends after 11 years.
Lender Protection and Additional Insurance
PMI protects lenders if a borrower fails to repay the loan. Some lenders may also recommend life insurance. This gives added security by covering the mortgage if the borrower passes away before the loan is fully paid.
While not mandatory, life insurance tied to your mortgage may offer extra peace of mind. However, some experts believe level term policies are more cost-effective than decreasing term policies that follow your loan balance.
The Real Cost of Getting In Early
Private mortgage insurance comes with a price, but so does waiting. Every year spent renting is a year not building equity. PMI gives you a way in, but it’s not a free pass. It’s a trade-off between access and responsibility. If you’re using PMI to become a homeowner sooner, treat it as a temporary stepping stone, not a long-term crutch. Make your payments count, watch your equity grow, and plan your exit strategy. That’s how you make PMI work for you, not the other way around.