What Is PMI? How Private Mortgage Insurance Works
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Buying a home usually has a monster obstacle: coming up with a sufficient down payment. Mortgage insurance allows a borrower to make a smaller down payment than a lender would otherwise require.
What is private mortgage insurance?
Private mortgage insurance, or PMI, is a type of coverage you buy if you get a conventional mortgage — one that isn't federally guaranteed — and put down less than 20% to purchase a home or have less than 20% equity when refinancing.
PMI is insurance for the mortgage lender’s benefit, not yours. The coverage will pay a portion of the balance due to the mortgage lender in the event you default on the home loan. Usually, you pay for PMI monthly as part of your mortgage payment. The insurance does not prevent you from facing foreclosure or experiencing a decrease in your credit score if you get behind on mortgage payments.
The lender requires PMI because it is assuming additional risk by accepting a lower amount of upfront money toward the purchase. You can avoid PMI by making a 20% down payment.
Mortgage insurance for FHA loans, backed by the Federal Housing Administration, operates a little differently from PMI for conventional mortgages. VA loans, backed by the Department of Veterans Affairs, don't require mortgage insurance, but do include a "funding fee." USDA mortgages, backed by the U.S. Department of Agriculture, don't require traditional PMI but do have an upfront and an annual fee.
» MORE: What is mortgage insurance?
How much is PMI?
The average annual cost of PMI typically ranges from 0.46% to 1.5% of the loan amount, depending on your credit score, according to a December 2023 report from the Urban Institute's Housing Finance Policy Center. Borrowers with excellent credit get the lowest PMI rates.
Those averages were calculated using a $289,500 mortgage — the loan balance you’d have if you bought a $300,000 home and made a 3.5% down payment.
For that loan amount at those rates, PMI could cost anywhere from around $1,332 to $4,343 per year, or about $111 to $362 to a month.
The cost of private mortgage insurance depends on several factors:
The size of the mortgage loan. The more you borrow, the more you pay for PMI.
Down payment amount. The more money you put down for the home, the less you pay for PMI.
Your credit score. PMI will cost less if you have a higher credit score. Generally you'll see the lowest PMI rates for a credit score of 760 or above.
The type of mortgage. PMI may cost more for an adjustable-rate mortgage than a fixed-rate mortgage. Because the rate can go up with an adjustable-rate mortgage, the loan is riskier than a fixed-rate loan, so PMI tends to be higher.
Estimating the cost of PMI before you get a mortgage can help you determine how much home you can afford.
Typically, the PMI cost, called a “premium,” is added to your monthly mortgage payment. You can see the premium on your Loan Estimate and Closing Disclosure mortgage documents.
Sometimes lenders offer the option to pay the PMI cost in one upfront premium or with a combination of upfront and monthly premiums.
» MORE: Calculate your PMI
Is PMI tax-deductible?
Private mortgage insurance is not tax-deductible for the 2023 tax year. The itemized deduction for mortgage insurance has expired.
When can you stop paying for PMI?
Once your mortgage principal balance is less than 80% of the original appraised value, you can ask the mortgage loan servicer to cancel PMI. Often there are additional requirements, such as a history of timely payments and the absence of a second mortgage.
If you don't request cancellation, the lender or service must cancel PMI once your mortgage balance reaches 78% of the original value of the home, or you reach the halfway point through the loan's original term..
» MORE: How to save for a down payment
No-PMI mortgages
Some lenders offer "no-PMI mortgages," allowing down payments of less than 20% on conventional loans without requiring private mortgage insurance. Known as "lender-paid PMI," these loans typically have a higher interest rate. Whether this would be a better deal than paying for PMI will depend on the mortgage rate, lender fees and how long you plan to stay in the home. Compare the costs to decide which mortgage is right for you.
Save money on PMI
Some state housing authorities offer conventional home loans with reduced mortgage insurance costs and below-market interest rates for first-time home buyers. Check out the programs available in your state for details.
Other low-down-payment mortgage options
Conventional loans with private mortgage insurance aren't the only choice if you have limited cash for a down payment. A government-backed loan may fit the bill:
FHA loans, insured by the Federal Housing Administration, require as little as 3.5% down and are a good option for borrowers with lower credit scores.
USDA loans, backed by the U.S. Department of Agriculture, require no down payment and are for lower- to moderate-income home buyers in designated rural areas.
VA loans, guaranteed by the Department of Veterans Affairs, require no down payment and are for active-duty and veteran military members.
