What Is Private Mortgage Insurance (PMI)?
In plain English
Private mortgage insurance is a policy required by lenders when a borrower puts down less than 20% on a conventional mortgage. PMI protects the lender against default losses, not the homeowner. It typically costs 0.2% to 2% of the loan amount annually, added to your monthly payment, until your equity reaches 20% of the home's original value.
How Much Does PMI Cost?
PMI premiums depend on your credit score, down payment, and loan amount. For a $300,000 loan, PMI might cost $50 to $150 per month. Borrowers with higher credit scores and larger down payments pay lower PMI rates. Some lenders offer single-premium PMI paid upfront at closing, which can save money if you plan to keep the loan long-term.
How Do You Cancel PMI?
Under the Homeowners Protection Act, you can request PMI cancellation once your loan balance falls to 80% of the home's original purchase price. Lenders must automatically cancel PMI when your balance reaches 78%. A new appraisal showing significant appreciation may also allow earlier cancellation if the loan-to-value ratio drops below 80% based on current value.
Are There Ways to Avoid PMI?
The simplest way is to make a 20% down payment. Alternatively, some lenders offer lender-paid PMI, where they cover the insurance in exchange for a higher interest rate. A piggyback loan — an 80/10/10 structure with a second mortgage — is another strategy. VA loans have no PMI requirement, and USDA loans charge a different guarantee fee instead.
Frequently asked questions
Is PMI the same as homeowners insurance?
No. Homeowners insurance covers damage to your home and liability. PMI covers the lender's risk if you default. Both may be required, but they serve completely different purposes and are separate policies.
Can I deduct PMI on my taxes?
Congress has periodically allowed a PMI deduction, but it has not always been in effect. Check current tax law or consult a tax professional to see if a PMI deduction applies to your situation this year.
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Related terms
Mortgage
A mortgage is a loan used to purchase real estate, where the property itself serves as collateral. It's typically repaid over 15 or 30 years through monthly payments of principal and interest.
Down Payment
A down payment is the upfront cash you pay toward a home purchase, with the mortgage covering the rest. The larger your down payment, the less you borrow and the lower your monthly payments.
Home Equity
Home equity is the portion of your home's value that you actually own, free of any mortgage debt. It grows as you pay down your loan and as your home appreciates in value.
Refinancing
Refinancing replaces your existing mortgage with a new one, typically to get a lower interest rate or change loan terms. It can reduce monthly payments or help you pay off your home faster.
Fixed-Rate Mortgage
A fixed-rate mortgage locks in your interest rate for the entire loan term, so your principal and interest payment never changes. It offers predictability and protection against rising rates.