The Short Answer
PMI stands for private mortgage insurance. It’s an extra cost added to your mortgage when you make a down payment of less than 20% on a conventional home loan. PMI protects the lender — not you — if you stop making payments and the home goes into foreclosure.
It’s an added monthly expense, but it also makes homeownership possible sooner, since it lets you buy with a smaller down payment instead of waiting years to save 20%.
Why Lenders Require PMI
When you put down less than 20%, the lender is taking on more risk — you have less of your own money in the home, so they have less cushion if you default and they have to sell the property. PMI offsets that risk by reimbursing the lender for part of their loss.
It’s important to understand the trade-off: you pay the premium, but the coverage protects the lender. PMI does not make a payment on your behalf or protect your equity if you fall behind.
How Much Does PMI Cost?
PMI typically costs between 0.5% and 1.5% of the loan amount per year, though it can fall outside that range. Your exact rate depends on your down payment size, credit score, and loan type — a larger down payment and a higher credit score generally mean a lower premium.
Example: On a $250,000 loan with PMI at 1% per year, you’d pay about $2,500 annually, or roughly $208 a month, added to your mortgage payment. That continues until you’ve built enough equity to drop the coverage.
How PMI Is Paid
The most common arrangement is a monthly premium added to your mortgage payment. But there are other structures:
- Monthly PMI — added to each mortgage payment; the standard approach
- Upfront PMI — a one-time premium paid at closing
- Lender-paid PMI — the lender covers PMI in exchange for a higher interest rate (so you pay indirectly through the rate)
- Split premium — a combination of an upfront amount plus a smaller monthly charge
How to Get Rid of PMI
The good news is PMI isn’t permanent. Once you build enough equity, you can stop paying it:
- Request cancellation at 20% equity. Under federal law (the Homeowners Protection Act), you can ask your lender to cancel PMI once your loan balance reaches 80% of the home’s original value.
- Automatic termination at 22% equity. The lender must automatically remove PMI once your balance reaches 78% of the original value, as long as you’re current on payments.
- A new appraisal. If your home’s value has risen, an appraisal showing you’ve reached the equity threshold may let you cancel sooner.
- Refinance. If you now have 20% equity, refinancing into a new loan can eliminate PMI (weigh this against refinancing costs).
PMI vs. FHA Mortgage Insurance
PMI applies to conventional loans. Government-backed FHA loans have their own version, called a mortgage insurance premium (MIP), which works differently — it often lasts for the life of the loan and can’t always be canceled the same way. If avoiding long-term insurance is a priority, that’s a meaningful difference to weigh when choosing a loan type.
The Bottom Line
PMI is private mortgage insurance you pay when your down payment is under 20% on a conventional loan. It protects the lender, costs roughly 0.5% to 1.5% of the loan per year, and can be canceled once you reach about 20% equity. For many buyers, accepting PMI is a reasonable trade-off to buy a home sooner rather than waiting years to save a full 20% down.
Frequently Asked Questions
How do I avoid paying PMI?
The most direct way is to make a down payment of 20% or more on a conventional loan. Some lenders also offer “piggyback” loan structures or lender-paid PMI options, but those have their own trade-offs to weigh.
When does PMI go away?
You can request cancellation once your loan balance reaches 80% of the home’s original value, and the lender must remove it automatically at 78% (if you’re current on payments). Rising home value or a refinance can also let you drop it sooner.
Does PMI protect me as the buyer?
No. Even though you pay the premium, PMI protects the lender against loss if you default. It does not protect your equity or make payments for you if you fall behind.
How much does PMI cost per month?
It depends on your loan size, credit score, and down payment, but it typically runs 0.5% to 1.5% of the loan amount per year. On a $250,000 loan at 1%, that’s about $208 a month.
Is PMI tax deductible?
The deductibility of PMI has changed over the years and depends on current tax law and your income. Check the latest IRS guidance or ask a tax professional, since rules in this area can change from year to year.
Is PMI the same as homeowners insurance?
No. Homeowners insurance protects you and your property against damage and liability. PMI protects the lender against the risk that you default on the loan. They’re entirely separate, and a mortgage may require both.