What is PMI (Private Mortgage Insurance)?
PMI (Private Mortgage Insurance) is insurance that protects the lender when a borrower makes a down payment of less than 20% on a conventional mortgage. PMI is provided by private insurance companies and costs 0.3-1.5% of the loan amount annually, typically paid as a monthly premium added to the mortgage payment.
PMI exists because lenders face higher risk when borrowers have less skin in the game. With less than 20% equity, borrowers are statistically more likely to default, and the lender is more likely to lose money on a foreclosure sale. PMI shifts some of that risk to the insurance company.
PMI cost examples
On a $300,000 home with 5% down ($285,000 loan), PMI at 0.7% annually costs approximately $166 per month. With 10% down ($270,000 loan), PMI might drop to 0.5%, costing $112 per month. The exact rate depends on credit score, LTV ratio, loan type, and the insurer. Higher credit scores qualify for lower PMI rates.
How to remove PMI
PMI on conventional loans can be cancelled in several ways. You can request cancellation when your LTV reaches 80% through payments or a new appraisal showing sufficient appreciation. PMI automatically terminates when LTV reaches 78% based on the original amortization schedule. You can also refinance into a new loan without PMI if you have 20%+ equity.
This differs from FHA MIP, which cannot be cancelled on most FHA loans originated after June 2013. The only way to eliminate FHA MIP is to refinance into a conventional loan.
PMI and real estate investors
Most investment property loans require 15-25% down, which eliminates PMI. However, investors using owner-occupant financing strategies (living in one unit of a duplex or fourplex) may use conventional loans with less than 20% down and encounter PMI. In these cases, the rental income from other units often more than covers the PMI cost, making it a worthwhile trade-off for the lower down payment requirement.