You are now leaving our website and entering a third-party website over which we have no control.
What is Private Mortgage Insurance (PMI)?
Key takeaways
- PMI is lender protection required on many conventional loans that have a down payment of less than 20%
- PMI costs typically range from 0.5% to 1.5% annually on the original loan, and they vary by loan amount, credit score, and down payment
- There are several ways to cancel PMI, and most involve improving your equity to 20% or more
Buying a home is exciting. But understanding all the costs involved can be tricky. One common expense that might surprise homebuyers is private mortgage insurance (PMI).
PMI is a type of insurance that protects the lender, not the borrower, if the homeowner stops making mortgage payments. It’s typically required on conventional loans when the down payment is less than 20% of the home’s purchase price.
Even though PMI benefits the lender, the homeowner pays the premium—often as part of the monthly house payment. It often is added to your monthly mortgage payment. While it can increase your costs, it also can help you qualify for a mortgage with a smaller down payment.
Why do lenders require PMI?
Lenders take on more risk when they back a borrower who doesn't make a down payment of at least 20% of the purchase price. PMI shifts part of the lender's risk to an insurance company, which will mitigate potential losses if a homeowner defaults on their loan.
However, PMI isn’t just for the lender’s benefit. It also helps borrowers by making homeownership accessible to those who haven’t yet saved a full 20% down payment. In other words, PMI can help you buy a home sooner rather than later.
How much does PMI cost?
PMI costs depend on several factors, including your loan amount, credit score, and down payment percentage.
On average, the cost of PMI ranges from 0.5% to 1.5% of your original loan amount per year. For example, if you borrow $300,000, annual PMI costs could total $1,500-$4,500, or roughly $125-$375 a month. Your lender can provide a good estimate during the mortgage application process.
Common factors that may affect PMI pricing include:
-
Down payment size. The smaller the down payment, the higher the cost of PMI could go
-
Credit profile. Borrowers with stronger credit profiles may pay less for PMI
-
Loan characteristics. Loan term length, whether the loan is fixed or adjustable, and other factors could influence pricing
-
PMI structure. Your costs could vary depending on whether you pay monthly or up front for the insurance
Types of PMI
PMI can be structured in a few different ways, depending on how you and your lender choose to handle the payments. Here are two of the most popular options:
1. Borrower-paid PMI
Borrower-paid PMI is the most common form of PMI. You pay a monthly premium as part of your regular mortgage payment. The insurance could be cancelled when you have around 20% equity in your home.
2. Lender-paid mortgage insurance
With lender paid mortgage insurance (LPMI), your lender pays the insurance premium but may place a higher interest rate on your mortgage. This could result in you paying more in interest than you would have paid for PMI. There typically is no way to cancel this type of mortgage insurance. However, you could refinance in a way that enables you to avoid PMI.
How can I remove PMI?
The good news is that PMI doesn’t last forever in all cases. Here are a few ways to get away from it.
1. Request cancellation at 20% equity
You can send a PMI cancellation request once your mortgage balance drops to 80% of your home’s original value.
2. Automatic cancellation at 78% LTV
A loan-to-value (LTV) ratio compares your mortgage balance to the value of the property when you bought it. Lenders are typically required to cancel private mortgage insurance (PMI) once your LTV reaches 78%, you have a good payment history with no missed payments, or when you reach the midpoint of your loan term.
3. Request removal after home value increases
If your home’s value rises due to market appreciation or renovations, your equity might hit 20% sooner. You can pursue removing PMI though your lender. However, you may need a home appraisal for PMI removal to confirm the new value.
4. Refinance to remove PMI
Depending on the new terms and the value of your house, refinancing your mortgage could enable you to get out from under PMI.
How does PMI differ from FHA mortgage insurance?
FHA loans have their own mortgage insurance program—the Mortgage Insurance Premium (MIP). Here are a few ways that MIP differs from PMI:
-
FHA loans are designed for borrowers with lower credit scores or smaller down payments. They require mortgage insurance (MIP) regardless of the size of the down payment
-
PMI can be canceled through various means, but MIP either lasts for the full term of the mortgage or 11 years, depending on the amount borrowed, the loan term, and the down payment
-
MIP includes both an annual premium and an upfront amount, which might be rolled into the mortgage
Is PMI worth it?
For some buyers, especially first-time homeowners, PMI can be worth the cost. It allows you to purchase a home sooner without waiting years to save a 20% down payment.
While it does increase your monthly mortgage bill, PMI can be a small price to pay if it helps you build equity and benefit from potential home appreciation faster. Over time, the value you gain from early homeownership could outweigh the added cost of PMI.
FAQs
PMI stands for private mortgage insurance, a policy that protects lenders on conventional loans if borrowers cannot pay back the money. PMI may be required if you make a down payment of less than 20%.
When a down payment is less than 20%, it increases the lender's risk of losing money in the event of a foreclosure. Lenders obtain coverage from private insurance companies to mitigate that risk and pass the cost along to their borrowers.
PMI protects the lender, not the homeowner. Unlike homeowner insurance, it does not cover your home or belongings.
However, it does help borrowers by making homeownership accessible to those who haven’t yet saved a full 20% down payment. PMI helps people enjoy the benefits of home ownership earlier in life.
Lenders typically are required to cancel PMI once your LTV drops to 78% of the home’s value when you bought it, and your account is in good standing, or you are halfway through your loan term.
You also can send a PMI cancellation request to your lender when you build equity up to 20%. Another option is to refinance your mortgage so that you meet the requirements for avoiding PMI.
Related articles
Learn about what to expect with the mortgage and home loan lending process starting with preparing for the application process all the way through closing.
Learn more about mortgage refinance options with TD Bank. Explore why it may be a good option, get a rate quote and see how to get started.
Shopping for a mortgage is crucial to the homebuying process. Compare non-conventional vs. conventional loans, learn some key mortgage terms and more.