If you buy a home with less than 20% down, your lender will almost always require private mortgage insurance, or PMI. It's one of the most misunderstood line items in a mortgage, partly because of a counterintuitive fact: you pay for it, but it doesn't protect you. PMI protects the lender if you stop making payments. Understanding how it works — and how to make it go away — can save you hundreds of dollars a month.
Why lenders require PMI
When you put down less than 20%, the lender is taking on more risk. If you default early and they have to foreclose, the unpaid balance may exceed what the home sells for. PMI is an insurance policy that covers the lender for part of that loss. Because the risk is tied to how little equity you have, the rule of thumb is simple: less than 20% down means PMI; 20% or more means none.
How much PMI costs
PMI typically runs between 0.3% and 1.5% of the loan amount per year, billed monthly. The exact rate depends on your credit score, your down payment, and the loan type. A lower credit score or a smaller down payment pushes the rate up.
Here's a concrete example. On a $400,000 home with 10% down, you finance $360,000. At a 0.5% annual PMI rate, that's $1,800 a year, or $150 a month — on top of principal, interest, taxes, and insurance. That's money that builds no equity and benefits you in no way except making the loan possible.
The four ways PMI ends
- Automatic termination. Under the federal Homeowners Protection Act, your lender must automatically cancel PMI once your loan balance reaches 78% of the original home value, as long as you're current on payments. This happens on a preset schedule regardless of whether you ask.
- Borrower-requested cancellation. You can request cancellation once you reach 20% equity (an 80% loan-to-value ratio) based on the original value. This is faster than waiting for the 78% automatic point.
- Reaching 20% through appreciation. If your home's value rises, you may hit 20% equity sooner than your payment schedule alone would. You'll typically need to pay for an appraisal to prove the new value.
- Refinancing. If you refinance into a new loan and have 20% equity at that point, the new loan won't carry PMI.
How to avoid PMI in the first place
The cleanest way is a 20% down payment, but that's a high bar in many markets. Other approaches include lender-paid PMI (the lender covers it in exchange for a higher interest rate — sometimes cheaper over a short horizon), or a piggyback loan structure. Each has tradeoffs, and the math depends on how long you'll keep the loan.
See the number for your situation
The fastest way to understand PMI's impact is to plug your numbers in. Our mortgage calculator includes a PMI line that automatically applies when your down payment is under 20% and disappears when it isn't — so you can see exactly how much it adds to your monthly payment and how a larger down payment changes things.
Before you stretch for a home, it's also worth checking what you can realistically carry each month. Our guide to take-home pay by state shows how much actually lands in your account after taxes, which is the real budget your mortgage has to fit inside.
BPMI vs. LPMI vs. a piggyback loan
"PMI" is usually borrower-paid monthly PMI, but it's not the only structure, and the alternatives have real tradeoffs. Borrower-paid PMI (BPMI) is the standard: a monthly premium added to your payment that you can cancel once you reach 20% equity. Its big advantage is that it goes away — which makes it attractive if you expect to build equity reasonably soon.
Lender-paid PMI (LPMI) swaps the monthly premium for a permanently higher interest rate. Your monthly payment may look lower than with BPMI, but the higher rate lasts for the life of the loan and can't be cancelled at 20% equity. Over a short holding period LPMI can come out cheaper; over a long one, BPMI you cancel early usually wins. A piggyback structure (sometimes called 80/10/10) splits the financing into a first mortgage for 80%, a second loan for 10%, and 10% down, avoiding PMI entirely — but the second loan typically carries a higher rate and its own payment. Which is cheapest depends on the rates you're quoted and how long you'll keep the loan, so it's a math problem, not a one-size answer.
A worked comparison
Suppose you're financing $360,000 on a $400,000 home with 10% down. At an illustrative 0.5% annual BPMI rate, that's about $1,800 a year, or roughly $150 a month, until you reach 20% equity. If it takes, say, four years to get there through normal payments and modest appreciation, you'd pay on the order of $7,000 in PMI total — then it disappears. With LPMI, you'd instead carry a higher interest rate for the entire loan; whether that beats $7,000-and-done depends on how much higher the rate is and how long you keep the mortgage. Running both scenarios as monthly numbers is the only way to see which actually costs less for your situation.
The mistakes that keep people paying PMI too long
- Not tracking equity. The borrower-requested cancellation at 20% is faster than waiting for the automatic 78% point — but you have to ask. Many people pay months longer simply because they never request it.
- Overlooking appreciation. If home values in your area have risen, you may already have 20% equity even if your loan balance suggests otherwise. Proving it usually requires a lender-approved appraisal, but the PMI savings can far exceed the appraisal cost.
- Confusing FHA mortgage insurance with PMI. FHA loans carry their own mortgage insurance premium with different — and often non-cancellable — rules. The conventional-loan PMI rules in this guide don't all transfer to FHA loans.
- Assuming extra principal payments don't help. Paying down principal faster reaches the 20% threshold sooner, which can end PMI early and is one of the clearest returns on an extra payment.
Is avoiding PMI always the right goal?
Not necessarily. PMI is the price of buying before you've saved a full 20% down, and sometimes that's a reasonable trade. If home prices in your market are rising faster than you can save, waiting years to avoid a few hundred dollars a month of cancellable PMI can cost more than the PMI itself. On the other hand, stretching into a home with a tiny down payment and large PMI can signal you're buying more house than you can comfortably carry. The right answer depends on your timeline, your local market, and how the full monthly payment fits your budget — which is the real test, not PMI in isolation. For anything beyond a rough estimate, your lender can quote exact PMI rates for your credit profile and loan.
How your credit score moves the PMI rate
PMI is priced on risk, and your credit score is one of the biggest inputs. Two buyers putting the same amount down on the same home can be quoted noticeably different PMI rates purely because of their credit scores — a stronger score signals lower default risk and earns a lower premium. The gap isn't trivial; across the years you carry PMI it can add up to a meaningful sum. That makes the months before a home purchase a particularly valuable time to avoid new credit mistakes: a missed payment or a fresh large balance can nudge your score down right when it's setting both your mortgage rate and your PMI rate. If your score is on the edge of a better tier, even a small improvement before you lock in can lower the premium for the entire time you pay it. As with the loan itself, the only way to see your real number is to get quotes based on your actual profile — but knowing that the score drives the rate tells you where a little effort beforehand pays off.
This guide is general information, not financial advice. PMI rules and rates vary by lender and loan type — confirm specifics with your lender.