Breaking Down Private Mortgage Insurance (PMI)
Buying a home is one of life’s biggest milestones. But if you’re putting down less than 20% on your mortgage, there’s a good chance you’ve come across something called Private Mortgage Insurance (PMI).
For many homebuyers, PMI can feel confusing or even frustrating. Why pay for extra insurance if you’re already making your monthly mortgage payments? The truth is, PMI plays an important role in helping more people achieve homeownership — and understanding how it works can help you save money and plan ahead with confidence.
At Rate Simple, we believe knowledge is power. Let’s break down what PMI really is, what it costs, and how you can avoid or remove it when the time is right.
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance, or PMI, is a type of insurance that protects the lender — not the borrower — if you stop making mortgage payments. It’s typically required on conventional loans when your down payment is less than 20% of the home’s value.
While it doesn’t directly benefit you as a homeowner, PMI allows lenders to take on more risk and approve loans for buyers who haven’t saved up a large down payment. In other words, PMI helps open the door to homeownership for more people.
You’ll pay PMI as part of your monthly mortgage payment until you’ve built enough equity in your home — usually once you reach 20% ownership.
How Much Does PMI Cost?
The cost of PMI varies depending on your loan size, credit score, and down payment amount. On average, PMI costs between 0.3% and 1.5% of your loan amount per year.
Here’s a quick example:
| Home Price | Down Payment | Loan Amount | Estimated Annual PMI (0.8%) |
|---|---|---|---|
| $400,000 | 10% ($40,000) | $360,000 | $2,880 per year ($240/month) |
While that might sound like a lot, PMI is designed to be temporary. Once your home equity increases, you can often cancel it — putting that money right back into your pocket each month.
Types of PMI You Might Encounter
There are several forms of PMI, and understanding the differences can help you choose what fits best:
- Borrower-Paid PMI (BPMI): The most common type, paid monthly as part of your mortgage payment.
- Single-Premium PMI: A one-time payment made at closing, which can reduce your ongoing costs.
- Lender-Paid PMI (LPMI): Your lender covers the PMI cost, but typically charges a higher interest rate in return.
Each type has pros and cons depending on how long you plan to stay in your home and your financial goals. A Rate Simple loan specialist can help you compare which option offers the best long-term savings.
How to Avoid Paying PMI
If you want to avoid PMI altogether, there are a few strategies to consider:
- Put at least 20% down. This is the simplest way to skip PMI entirely.
- Explore piggyback loans. Some buyers use a second “piggyback” loan to cover part of the down payment and avoid PMI.
- Improve your credit score. A higher score may qualify you for better loan terms or reduce PMI costs.
- Consider lender-paid options. In some cases, your lender may cover PMI in exchange for a slightly higher rate.
While avoiding PMI can save you money, don’t let it stop you from buying a home if you’re ready. In many cases, paying PMI temporarily can still make sense — especially if home prices are rising faster than you can save a larger down payment.
When and How to Remove PMI
Good news: PMI doesn’t last forever. You can request to cancel PMI once you’ve reached 20% equity, meaning your mortgage balance is 80% or less of your home’s original value.
Your lender is required to automatically remove PMI once you reach 22% equity, as long as your payments are current.
You can also speed up the process by:
- Making extra principal payments each month
- Getting a new home appraisal that shows your property value has increased
- Refinancing your mortgage to reflect your higher equity
PMI- Final Thoughts
PMI isn’t just an extra fee — it’s a tool that helps more people buy homes sooner. And while it’s temporary, understanding how it works can help you plan your payments and make smart financial moves down the road.
If you’re exploring your mortgage options, Rate Simple can help you run the numbers and see how different down payments or loan terms affect your costs, including PMI.
Get started today and find the mortgage that fits your financial goals — simply, clearly, and confidently.
