Private Mortgage Insurance (PMI)

PMI protects lenders, not you. It adds 0.5–2% annually to your loan if you down-pay less than 20%. The sooner you build 20% equity, the sooner you eliminate this pure-cost insurance.

Key takeaways

• PMI is required when loan-to-value (LTV) exceeds 80%, i.e., down payment under 20%.
• PMI costs 0.5–2% of the loan annually, typically $150–$400/month on a $300,000 loan.
• PMI is not tax-deductible (as of current law).
• PMI is removable once you reach 80% LTV through principal paydown or home appreciation.
• FHA loans carry permanent mortgage insurance if down payment is under 10% (a major hidden cost).

When PMI applies

PMI is required if LTV (loan amount ÷ home value) exceeds 80%.

Examples on a $350,000 purchase:

Down %	Loan	LTV	PMI Required?
3%	$339,500	97%	Yes
5%	$332,500	95%	Yes
10%	$315,000	90%	Yes
15%	$297,500	85%	Yes
20%	$280,000	80%	No

Anything above 80% LTV triggers PMI. The higher above 80%, the more expensive the PMI (credit score, property type, and lender all affect exact pricing).

How much does PMI cost?

PMI is typically quoted as an annual percentage of the loan balance.

Credit score impact (major determinant):

On a $280,000 loan at 90% LTV (10% down):

Credit Score	Annual PMI Rate	Monthly Cost
760+	0.50%	$117
700–759	0.75%	$175
680–699	1.00%	$233
660–679	1.25%	$292

A 100-point credit score difference (760 vs 660) can mean $175/month difference in PMI cost—equivalent to $21,000 over a 10-year period.

LTV impact:

On a $350,000 purchase with 680–699 credit score at 1.0% PMI rate:

Down %	Loan	LTV	Monthly PMI
5%	$332,500	95%	$277
10%	$315,000	90%	$263
15%	$297,500	85%	$248

Higher down payment = lower LTV = lower PMI cost. The difference between 5% and 15% down is 15% lower PMI costs.

PMI removal: How to get off it

As you build equity (through principal paydown and home appreciation), your LTV decreases. Once LTV reaches 80%, you can request PMI cancellation.

Principal paydown: Monthly payments reduce principal. After 10 years of paying on a $280,000 loan, you've reduced principal by ~$117,000 (42%). LTV drops from 100% to ~85%.

Home appreciation: If your home appreciates from $350,000 to $420,000 (a 20% gain over 5 years) and you've paid down principal by $30,000, your LTV has dropped substantially:

LTV = Loan balance ÷ Current home value LTV = ($280,000 − $30,000) ÷ $420,000 = 59.5%

You can request PMI removal.

Automatic termination: Conventional loans have automatic PMI termination rules. Loans with LTV over 80% may automatically drop PMI at:

• 78% LTV if recent appraisal supports it
• Principal paydown alone (no reappraisal needed)

Some loans require you to request removal and pay for a new appraisal (~$500–$600).

Refinancing: If rates drop significantly, you might refinance. A new appraisal at that time can show current home value. If appreciation has been strong, you might drop below 80% LTV and avoid PMI in the new loan.

FHA PMI: Permanent if under 10% down

FHA loans are particularly expensive on PMI. They have two insurance premiums:

1. Upfront Mortgage Insurance Premium (UFMIP): 1.75% of the loan, added to your loan balance immediately.
2. Annual Mortgage Insurance Premium (AMIP): 0.55–0.80% annually, depending on LTV and loan term.

Cruelly, FHA MIP is permanent if your down payment is under 10%. You cannot remove it by building equity or refinancing (unless you refinance to a conventional loan, which requires 20% equity).

Example: FHA loan, 3.5% down ($12,250 on $350,000 home).

• Loan: $337,750
• UFMIP (1.75%): $5,910 (added to loan balance)
• New loan balance: $343,660
• Monthly AMIP (0.80%): $229
• PMI is permanent for the entire loan term unless refinanced

Over 30 years: $229 × 360 = $82,440 in annual mortgage insurance.

Compare: Conventional loan, 10% down, PMI at 0.75%:

• Loan: $315,000
• Monthly PMI: $197 (drops when reaching 80% LTV, ~10 years)
• Total PMI paid (10 years): $197 × 120 = $23,640
• Savings vs. FHA: $82,440 − $23,640 = $58,800

FHA is only cheaper if you plan to refinance within 5 years, or if you have very poor credit and can't qualify for conventional loans.

Worked example: 3% vs 10% vs 20% down on a $350,000 home

All at 6% rate, 30-year term, 700 credit score.

Option A: 3% down ($10,500)

• Loan: $339,500
• LTV: 97%
• PMI (1.0% annual): $283/month
• P&I: $2,037
• Total monthly (P&I + PMI): $2,320
• PMI drops at 80% LTV (~10 years)
• First 10 years cost: $2,320 × 120 = $278,400
• Remaining 20 years (no PMI): $2,037 × 240 = $488,880
• 30-year total: $767,280

Option B: 10% down ($35,000)

• Loan: $315,000
• LTV: 90%
• PMI (0.75% annual): $197/month
• P&I: $1,892
• Total monthly (P&I + PMI): $2,089
• PMI drops at 80% LTV (~10 years)
• First 10 years cost: $2,089 × 120 = $250,680
• Remaining 20 years (no PMI): $1,892 × 240 = $454,080
• 30-year total: $704,760

Option C: 20% down ($70,000)

• Loan: $280,000
• LTV: 80%
• PMI: $0
• P&I: $1,679
• Total monthly: $1,679
• 30-year total: $604,440

Comparison:

• 3% vs 20% down difference: $767,280 − $604,440 = $162,840 extra cost
  • Down payment difference: $70,000 − $10,500 = $59,500
  • Cost disadvantage of 3% down: $162,840 − $59,500 = $103,340 in extra payments and PMI
• 10% vs 20% down difference: $704,760 − $604,440 = $100,320 extra cost
  • Down payment difference: $70,000 − $35,000 = $35,000
  • Cost disadvantage of 10% down: $100,320 − $35,000 = $65,320 in extra payments and PMI

Conclusion: The 3% down option costs the most in total dollars, but spreads it over 30 years. If you have $70,000 saved, putting 20% down eliminates PMI entirely and saves $100k+ over 30 years.

PMI removal strategy: Accelerate with extra principal

If you put 10% down and have extra cash, paying principal aggressively reduces the time to 80% LTV:

Loan: $315,000 at 6% over 30 years.

• Standard: Reach 80% LTV (~$252,000 balance) in ~10 years
• With extra $200/month principal: Reach 80% LTV in ~8 years
• PMI savings: $197/month × 24 months = $4,728

The extra $200/month principal × 96 months = $19,200 spent, saving $4,728 in PMI. Net cost: $14,472. But you've accelerated home equity and could have refinanced or faced another 2 years of PMI if you hadn't.

Lender comparison: PMI varies significantly

PMI rates vary by lender. Shopping 4–5 lenders on a $315,000 loan at 90% LTV with 700 credit score might reveal:

• Lender A: 0.75% annual PMI = $197/month
• Lender B: 0.85% annual PMI = $223/month
• Lender C: 0.95% annual PMI = $249/month

Over 10 years, difference between A and C: ($249 − $197) × 120 = $6,240. Shopping lenders matters.

Decision tree

Next

You've now covered the core mortgage decisions: type, term, rate, points, and insurance. Before you make an offer, you need to understand the pre-approval process—what lenders actually check, the difference between pre-qualification and pre-approval, and how underwriting can derail a deal if you're not careful.

Related concepts

• Down Payment Options: 3% vs 20%
• Mortgage Pre-Approval Process