What Is PMI? (And Can You Get Rid of It?)

What is PMI?

Private mortgage insurance, or PMI, is a type of coverage that comes attached to some home loans. Instead of protecting you as the homeowner, it’s there to give your lender peace of mind. If you ever stopped making payments and your home ended up in foreclosure, the sale might not be enough to pay back the full loan balance. That’s where PMI steps in: it makes sure the lender doesn’t lose money in the process.

By lowering the lender’s risk, PMI helps make mortgages more widely available to buyers. It doesn’t directly benefit you, but it can still be a stepping stone toward getting into a home. In short, PMI is one of the ways lenders keep the system moving while still protecting themselves financially.

When is PMI required?

PMI is usually required when you obtain a conventional mortgage and make a down payment that’s less than 20% of the home’s purchase price. A conventional mortgage is any mortgage that’s not part of a government program, according to the Consumer Financial Protection Bureau (CFPB). So, FHA and VA loans are not conventional mortgages, as they are insured by government programs.

If you’re shopping for a mortgage, you can find out whether you’re required to have PMI from your prospective lender. They are required to disclose PMI costs on your Loan Estimate and on your Closing Disclosure.

Your lender may require you to make ongoing, monthly PMI payments, an up-front PMI payment at closing, or a combination of the two. Some lenders let you choose which option you prefer.

How much does PMI cost?

PMI costs vary, but they typically range from 0.5% to 1% of the loan amount annually. So, for a $200,000 mortgage, your PMI could be $1,000 to $2,000 per year. That’s in addition to your mortgage payment, homeowner’s insurance, and property taxes.

If you have a low credit score or a high loan-to-value ratio, your costs could be even higher. Your loan-to-value ratio is the amount of your loan when compared to the value of your home. If you make a 5% down payment, your loan-to-value ratio is 95%, and you will likely have a higher PMI payment than someone who makes a 10% down payment.

How can you avoid PMI?

The simplest way to avoid PMI is to make a 20% or higher down payment. That isn’t always realistic, though. Some other options include:

Shop around: Some lenders may offer a conventional loan without PMI, even if your down payment is less than 20%. Review these offers carefully, though, as the interest rate may be higher than a mortgage with PMI. You could end up paying even more in total costs just to avoid PMI.

Consider other types of loans: For example, FHA loans and VA loans don’t have PMI. They do have other fees, though. FHA loans require borrowers to pay upfront and ongoing mortgage insurance. Even with the insurance costs, an FHA loan may be a better deal for borrowers with lower credit scores than a conventional loan with PMI.

VA loans do not have PMI or mortgage insurance, but there is a funding fee, which varies depending on the amount of your down payment. And, of course, these loans are only available to U.S. veterans

Use a lender-paid mortgage insurance (LPMI) option: With LPMI, the lender pays the cost of mortgage insurance on your behalf, so you don’t see a separate PMI charge on your monthly bill. In exchange, your mortgage interest rate is set slightly higher to compensate for that expense.

This can make your monthly payment look simpler and sometimes even lower than paying PMI separately. However, unlike borrower-paid PMI, you typically can’t cancel LPMI once your home equity grows, so you may pay more over the life of the loan.

Seek out special loan programs: Some lenders and government-backed programs are designed to help buyers avoid PMI even with a smaller down payment. For example, certain state housing agencies or first-time buyer initiatives allow low down payments while offering alternatives to traditional PMI.

These programs may use different forms of insurance or subsidies to reduce lender risk without passing PMI costs directly to the borrower. It’s worth researching what’s available in your area, since eligibility often depends on income, location, or whether you’re a first-time buyer.

Take advantage of down payment assistance programs: Some state and local programs offer help with your down payment through grants, low-interest loans, or even forgivable loans. This extra boost can get you closer to the 20% mark, which can eliminate PMI altogether.

Even if it doesn’t cover the full amount, it can still shrink your loan balance and lower the PMI cost. Check what’s available in your area. Eligibility often depends on income, first-time buyer status, or where you’re buying.

When can you get rid of PMI?

If you already have a mortgage with PMI, don’t lose hope. You have the right to cancel your PMI once your mortgage balance is 80% of the original value of your home.

The date when you reach the magical 80% number should be included on your PMI disclosure form. If you can’t find it, contact your lender. You can also reach that number sooner if you make additional payments to reduce your loan balance.

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How to cancel PMI

To cancel PMI, you must make a request in writing and be current on your mortgage payments. In some cases, your lender may request an appraisal to make sure the value of your home hasn’t dropped.

If you don’t ask for PMI to be removed, your lender should drop it automatically when your loan balance reaches 78% of the original home value.

If you have any questions about PMI, contact your lender. The payments might be annoying, but at least they’re only temporary.

Plan for homeownership success

PMI can feel like an extra burden when you’re already budgeting for a new home, but understanding how it works and the ways to minimize or avoid it can make a big difference. Knowing your options, from larger down payments to special loan programs, gives you more control over your mortgage costs.

While PMI protects the lender, taking steps to reduce it can save you money and help you reach homeownership faster. Staying informed and planning are key to making smart financial choices when buying a home.

A knowledgeable buyer’s agent can help you identify homes and financing options that minimize PMI, potentially saving you hundreds each month. If you’re ready to take the next step, use HomeLight’s free Agent Match tool to connect with a local expert who can guide you through the process and help you save.

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