Private Mortgage Insurance (PMI) is a type of insurance that protects lenders in case a borrower defaults on their home loan. PMI is typically required for conventional mortgage borrowers who make a down payment of less than 20% of the home’s purchase price. While PMI increases the overall cost of a mortgage, it enables buyers to purchase a home with a lower upfront investment.
1. How Does PMI Work?
PMI does not protect the borrower—it protects the lender. If a borrower stops making mortgage payments and the home goes into foreclosure, PMI helps the lender recover their losses. Borrowers pay monthly PMI premiums as part of their mortgage payment until they meet certain equity requirements.
2. When Is PMI Required?
PMI is generally required for:
- Conventional loans with a down payment of less than 20%
- Refinancing when the homeowner’s equity is less than 20% of the home’s value
PMI is not required for government-backed loans such as FHA loans, which have their own mortgage insurance requirements.
3. Types of PMI
There are different ways PMI can be structured, depending on the lender and borrower’s preference:
Borrower-Paid PMI (BPMI)
- The most common type of PMI
- Paid as part of the monthly mortgage payment
- Can be canceled once the homeowner reaches 20% equity in the home
Lender-Paid PMI (LPMI)
- The lender pays the PMI cost but charges the borrower a higher interest rate
- Cannot be canceled—borrowers must refinance to remove it
Single-Premium PMI (SPMI)
- Paid upfront as a lump sum at closing instead of monthly payments
- Eliminates ongoing PMI costs but increases closing expenses
Split-Premium PMI
- A hybrid option where part of the PMI is paid upfront, and the rest is added to monthly payments
- Reduces the monthly PMI cost compared to BPMI
4. How Much Does PMI Cost?
PMI costs vary depending on:
- Loan amount – Higher loan balances result in higher PMI costs
- Down payment percentage – A larger down payment lowers PMI costs
- Credit score – Higher credit scores qualify for lower PMI rates
- Loan type and term – Riskier loans (e.g., adjustable-rate mortgages) may have higher PMI rates
On average, PMI costs range from 0.3% to 1.5% of the original loan amount annually. For a $300,000 loan, PMI could cost $75 to $375 per month.
5. How to Remove PMI
Automatic Cancellation
Lenders are required by law to remove PMI once a homeowner reaches 22% equity in their home, based on the original loan balance.
Request PMI Removal
Homeowners can request PMI cancellation once they reach 20% equity. This often requires a home appraisal to confirm the updated property value.
Refinancing
If home values have increased significantly, refinancing can help borrowers reach 20% equity sooner and eliminate PMI.
6. Is PMI Worth It?
While PMI adds an extra cost to a mortgage, it allows borrowers to buy a home sooner without waiting to save a full 20% down payment. If home values appreciate quickly, PMI may only be needed for a short period before it can be removed.
Final Thoughts
Private Mortgage Insurance is an added expense for borrowers with low down payments, but it makes homeownership more accessible. Understanding how PMI works, how much it costs, and how to remove it can help borrowers make informed financial decisions when purchasing or refinancing a home.
