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PMI is required when you put less than 20% down on a conventional mortgage. Here's how much it costs, how to remove it, and strategies to avoid it entirely.
This guide is designed for first-pass understanding. Start with core terms, then apply the framework in your own account workflow.
Private Mortgage Insurance is one of those costs that catches first-time homebuyers off guard. You save for years, finally scrape together a down payment, and then discover an extra $150-400 per month tacked onto your mortgage payment; for insurance that protects the bank, not you. Understanding PMI; how it works, what it costs, and how to get rid of it — can save you thousands over the life of your mortgage.
PMI is insurance that protects your lender (not you) if you default on your mortgage. When you put less than 20% down on a conventional loan, the lender considers you a higher-risk borrower. PMI compensates them for that risk by covering a portion of the outstanding loan balance if you stop making payments and the home goes to foreclosure.
Here's the frustrating part: you pay for it, but you get no benefit from it. PMI doesn't protect you, your equity, or your family. It exists solely to make lenders comfortable lending to borrowers with smaller down payments. The only silver lining is that PMI makes it possible to buy a home with less than 20% down; without it, most lenders wouldn't offer those loans at all.
PMI typically costs between 0.5% and 1.5% of your original loan amount per year. The exact rate depends on your credit score, down payment percentage, loan amount, and loan type. Here's what that looks like in real dollars:
Your credit score is the biggest factor in your PMI rate. A borrower with a 760+ credit score putting 10% down might pay 0.3-0.5%. A borrower with a 660 score putting 5% down could pay 1.5% or more. Over the years you carry PMI, that difference adds up to thousands of dollars.
Clarity can help you track this cost. When you connect your mortgage account, you'll see exactly how much of your monthly payment goes to PMI versus principal, interest, taxes, and insurance; giving you a clear picture of your true housing costs.
PMI isn't one-size-fits-all. There are several ways it can be structured:
Private Mortgage Insurance (PMI) is insurance that protects the lender (not you) if you default on your mortgage. It's required on conventional loans when you put down less than 20%. PMI typically costs 0.5-1.5% of the loan amount annually — on a $400K mortgage, that's $2,000-$6,000 per year.
PMI on conventional loans automatically terminates when your loan-to-value ratio reaches 78% (based on the original value). You can request removal at 80% LTV. You can also get a new appraisal if your home has appreciated significantly, potentially reaching 80% LTV faster than scheduled.
Yes — options include lender-paid PMI (rolled into a higher interest rate), piggyback loans (80/10/10 structure), VA loans (0% down, no PMI for veterans), and some credit union programs. Compare the total cost of each option over your expected holding period.
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Here's the good news: PMI on conventional loans is temporary. You have several paths to removal:
Under the Homeowners Protection Act (HPA), your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price. This happens based on your amortization schedule; it's automatic, and you don't need to request it. However, you must be current on your payments.
You can request PMI removal once your loan balance reaches 80% of the original purchase price (20% equity). This is earlier than the automatic 78% threshold. You must be current on payments, have a good payment history, and may need to pay for a new appraisal to confirm the home's value hasn't declined.
If your home has appreciated significantly, you may have 20% equity sooner than your amortization schedule suggests. Refinancing into a new loan at the current appraised value can eliminate PMI; but factor in refinancing costs ($3,000-6,000 in closing costs) to make sure the math works.
Some lenders allow you to request a new appraisal to prove your home has appreciated enough to put you at 20% equity (based on current market value rather than original purchase price). Policies vary by lender, but it's worth asking, especially in markets with strong appreciation.
FHA loans don't have traditional PMI. Instead, they charge Mortgage Insurance Premium (MIP), which works differently and is generally worse for borrowers:
The critical difference: FHA MIP is extremely difficult to remove. If you put less than 10% down (which most FHA borrowers do), MIP stays for the entire life of the loan. The only way to eliminate it is to refinance into a conventional loan once you have 20% equity. If you put 10% or more down, MIP drops off after 11 years; still much longer than conventional PMI.
This is why many financial advisors recommend conventional loans over FHA when possible, even if the initial down payment requirement is similar. The long-term MIP cost on FHA loans can exceed $20,000-30,000 over the loan's life.
Some lenders offer a choice: pay PMI monthly, or accept a higher interest rate with no PMI (lender-paid PMI). Which is better? It depends on how long you plan to stay in the home:
Ask your lender to run both scenarios with your specific numbers. Compare the total cost of each option over your expected holding period.
This is the big question, and there's no universal answer. Here's a framework for deciding:
Pay PMI and buy now if:
Wait for 20% if:
Let's work through a real example. You're buying a $400,000 home with 10% down ($40,000). Your loan amount is $360,000.
PMI at 0.7% = $2,520 per year, or $210 per month. Based on your amortization schedule, you'll reach 80% LTV (loan-to-value) in approximately 7 years, assuming no extra payments and no home price appreciation.
Total PMI cost: roughly $210 x 84 months = $17,640. That's a significant amount. But compare it to the alternative: saving an additional $40,000 (to reach 20%) while paying rent. If your rent is $2,000 per month and it takes two more years to save, that's $48,000 in rent; plus whatever home price appreciation you miss. In many markets, PMI is the cheaper path.
If you're going to pay PMI, minimize the damage:
If you're currently paying PMI, check your latest mortgage statement for your current loan balance and calculate your loan-to-value ratio based on your original purchase price. If you're at or near 80%, contact your lender to request cancellation — some lenders won't proactively tell you when you're eligible. If you're considering buying a home with less than 20% down, ask your lender for a detailed PMI quote so you can factor the true monthly cost into your budget. Use Clarity to track your mortgage balance, home equity, and overall financial picture so you know exactly when PMI cancellation becomes an option. Those extra hundreds per month, redirected toward investments or extra mortgage payments, compound significantly over time.
Fixed-rate mortgages lock your rate for the full term. ARMs start lower but adjust with market rates. Here's how to decide and when ARMs make sense.