What is Private Mortgage Insurance (PMI), and How Does It Work?

Home Buying

Oct 20

Buying a home with less than 20% down? You’ll probably encounter private mortgage insurance (PMI), one of those costs that can sneak up on buyers—especially first timers. Thankfully, understanding how it all works can help you budget and plan more confidently.

In this guide, we’ll cover what PMI is, how much it costs, how you pay it, and how to get rid of it—plus a few insider tips on how to save money along the way.

What is PMI, and why is it required?

Private mortgage insurance is a policy that protects the lender should you stop making mortgage payments: reimbursing the lender for a portion of the loan balance as what’s essentially a risk-management tool for mortgage companies when borrowers don’t put down at least 20%.

PMI is typically required when:

You take out a conventional mortgage (that’s not government-backed).
You make a down payment of less than 20%.
You refinance, and your home equity falls below 20%.

It’s important to note that PMI doesn’t shield you from foreclosure or keep your credit safe but is instead purely about minimizing risk on the part of the lender.

Why less than 20%?

A 20% down payment is considered a conventional home loan benchmark and always has been, with borrowers instantly having a sizable stake in the property at this level: thus signaling financial stability and reducing the chance of default in the lender’s eyes, such upfront equity making them feel much more comfortable offering favorable loan terms in the absence of additional insurance.

In our current housing market, however, reaching that 20% threshold is tougher than ever. Home prices have surged in many areas, and wages haven’t always kept pace. For first-time buyers (many of whom are simultaneously managing student debt or high rental costs), saving tens of thousands of dollars for a down payment can feel out of reach.

This is precisely where PMI comes into play, acting as a bridge so buyers can secure a mortgage with as little as 3% to 5% down. The lender, taking on more risk in this case as the borrower has less skin in the game, offsets this by requiring PMI coverage. While PMI adds to monthly housing costs, it’s often a worthwhile trade-off for getting into a home sooner rather than waiting years to save the full 20%.

How much does PMI cost?

PMI costs aren’t a “one-size-fits-all” thing, with most homeowners typically paying anywhere from $30 to $70 each month for every $100,000 borrowed. If you take out a $300,000 mortgage, for example, your PMI could range from $90 to $210 per month on top of your regular mortgage payment. The exact amount depends on a few key factors:

How much you borrow

The larger your loan, the more you’ll pay for PMI. Bigger loans come with more risk for the lender.

Your down payment

The closer you get to 20% down, the lower your PMI. Even a few extra percentage points can help reduce your rate.

Your credit score

A higher score means a lower PMI premium. Borrowers with an excellent rating (typically 760+) nab the best deals.

Loan type

If you’re procuring an adjustable-rate mortgage (ARM), you might pay more in PMI than with a fixed-rate loan since ARMs are considered slightly riskier.

Just recently began shopping for a home? Know that estimating your PMI upfront can help you better understand total monthly costs and how much home you can realistically afford.

How and when do you pay PMI?

Most borrowers pay PMI as part of their monthly mortgage payment, listed alongside principal, interest, taxes, and homeowners’ insurance. You’ll find the estimated amount on your Loan Estimate and Closing Disclosure. Other payment options include:

Upfront PMI: Paying the full premium at closing
Split premium: Paying a smaller upfront amount with reduced monthly costs
Lender-paid PMI: Covered by the lender, but you’ll likely pay a higher interest rate in exchange

Your lender will walk you through your choices, but keep in mind that monthly PMI is the most common approach.

Is it possible to cancel PMI?

PMI isn’t permanent, and you can usually request to cancel it as soon as you reach 20% equity: something that builds over time as you pay down your loan and (ideally) the value of your home increases. Here’s how this typically works:

Request cancellation: When your balance hits 80% of the original home value
Automatic cancellation: With lenders cancelling PMI at 78% if payments are current
Refinancing: With refinancing pushing your equity above 20% and eliminating PMI (for homes that have appreciated)

You’ll typically need to meet certain conditions (e.g., having a solid payment history and no second mortgages) in order to qualify for a cancellation.

Is PMI tax-deductible?

For most homeowners, PMI isn’t currently tax-deductible on a primary residence (with previous deductions allowed by Congress now expired). However, starting in the 2026 tax year, due to the Big Beautiful Bill Act, the law does permanently reinstate deductions for mortgage insurance premiums, including private mortgage insurance.

Check with a tax professional to learn what (if anything) applies to your own unique situation.

How can you avoid PMI?

Steering clear of PMI entirely typically means putting 20% down, but a few creative workarounds do exist if that’s not possible including:

Piggyback loans

Also known as 80/10/10 loans, this involves taking out a first mortgage for 80%, a second loan for 10%, and putting 10% down to avoid PMI.

Lender-paid PMI

In this case, the lender covers PMI, but it’s baked into a slightly higher mortgage rate.

Special loan programs

Some lenders offer conventional loans with reduced (or no) PMI for qualified buyers, particularly first-time homeowners or low- to moderate-income borrowers.

Government-backed loans and mortgage insurance

If you're exploring loans outside the conventional realm, here's how mortgage insurance (or similar fees) work:

Upfront and annual guarantee fees instead of PMI

These programs help buyers who are putting little or nothing down but do come with their own long-term costs and rules. Keep in mind, this is not an exhaustive list; other programs or regional offerings are perhaps also available.

Saving money on PMI

If avoiding private mortgage insurance altogether isn’t an option, the next best thing is to simply reduce how much you’ll pay. PMI costs aren’t set in stone, and a few smart moves can make a noticeable difference in your monthly payment. Here are some practical ways to lower the cost:

Boost your credit score

Your credit score plays a major role in how much PMI you’ll pay. Generally, borrowers with scores of 760+ qualify for the best rates. Take steps to improve a score that falls below this before applying for a mortgage (e.g., paying down existing debt, making on-time payments, and avoiding new credit inquiries).

Increase your down payment

You don’t need to hit the full 20% in order to lower PMI costs. Increasing your down payment from 3% to 5% or from 5% to 10%, for example, can reduce the lender’s risk and (in turn) your insurance rate.

Shop around for lenders

Not all lenders work with the same PMI providers, and rates can differ based on underwriting policies, investor guidelines, or simply the insurer they partner with. It’s worth getting loan estimates from at least three different lenders to compare not just interest rates but also how much PMI costs with each one.

Consider a fixed-rate loan

PMI premiums are usually higher for adjustable-rate mortgages (ARMs) than fixed-rate loans since the former is viewed as riskier (your payment could go up, increasing the chance of missed payments). The higher level of stability associated with a fixed-rate mortgage can thus trigger a lower PMI rate.

Ask about lender-paid PMI

Some lenders will offer to cover PMI for you, typically in exchange for a slightly higher interest rate. This might make sense if you plan to stay in the home for a shorter period of time as it lowers upfront monthly costs, but be cautious: a higher rate could end up costing more than PMI would have over the long term.

Look into special loan programs

First-time homebuyer programs or loans via state housing agencies sometimes offer reduced PMI rates or alternatives that lower costs. These programs are often income-based and may include education prerequisites, but they’re worth exploring if you qualify.

PMI vs. MIP: What’s the difference?

Many buyers confuse PMI (private mortgage insurance) with MIP (mortgage insurance premium) used for FHA loans. While these serve similar purposes, they aren’t interchangeable:

PMI applies to conventional loans
MIP is required for FHA loans and includes upfront and annual costs that can last the entire loan term unless you refinance.

Understanding the difference can help you compare total loan costs in a more accurate way.

In sum: understanding PMI

PMI can feel bothersome as an extra cost, but it’s indeed a handy tool that makes homeownership possible for buyers lacking massive savings. Planning to buy a home with less than 20% down? Talk to your lender about:

How much PMI costs
Your payment options
Cancellation strategies if and when you qualify

A little preparation now could save you hundreds (or thousands) later.

Have questions about the home-buying process? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.

What people also ask

Not necessarily, as it allows people to buy homes with smaller down payments. The corresponding downside of an added monthly cost is often worth it for those looking to become homeowners sooner rather than later.
Yes, if your home’s value rises or you pay down your loan in an aggressive way, you may reach 20% equity more quickly and could thus cancel (but may need a new appraisal to prove it).
Yes, PMI can still apply if you put less than 20% down (though with stricter requirements and rates).
Absolutely. If your home has appreciated or you’ve paid down the loan significantly, refinancing into a new loan without PMI might make sense (just factor in closing costs).