Private Mortgage Insurance (PMI) is one of the most misunderstood aspects of home buying. It can add $50-$300+ to your monthly payment, but it's not permanent and can be avoided entirely with the right strategy.
What Is PMI?
When Is PMI Required?
PMI requirements depend on your loan type and down payment:
Conventional Loans
PMI required if: Down payment is less than 20%
Good news: PMI can be removed once you reach 20% equity. Automatically canceled at 22% equity.
FHA Loans
MIP (Mortgage Insurance Premium) required: Always, regardless of down payment
Bad news: MIP lasts for the life of the loan if you put down less than 10%. With 10%+ down, it drops after 11 years. Most people refinance to conventional to remove it.
VA Loans
No PMI: Ever, even with 0% down
Instead, you pay a one-time funding fee (2.15-3.3% of loan amount), which can be rolled into the loan. Waived for disabled veterans.
USDA Loans
Guarantee fee required: Similar to FHA, but lower rates
1% upfront fee plus 0.35% annual fee. Much cheaper than conventional PMI.
How Much Does PMI Cost?
Conventional PMI typically costs 0.5% to 1% of the loan amount annually, paid monthly. The exact rate depends on:
- •Down payment amount: Smaller down = higher PMI
- •Credit score: Lower score = higher PMI
- •Loan type: Fixed-rate vs. adjustable-rate
- •Property type: Investment properties cost more
Real-World Example
Over time: That's $2,700/year or $13,500 over 5 years. This is why removing PMI should be a priority once you reach 20% equity.
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4 Ways to Avoid PMI
Put Down 20% or More
The simplest way to avoid PMI is to make a 20% down payment. On a $400,000 home, that's $80,000.
Best for:
Buyers with substantial savings who want the lowest monthly payment and rates.
Use a Piggyback Loan (80-10-10)
Take two loans: a first mortgage for 80% of the home's value, a second mortgage (HELOC or home equity loan) for 10%, and put 10% down.
Best for:
Buyers with 10% down who want to avoid PMI but need some leverage.
Use a VA or USDA Loan
VA loans (veterans) and USDA loans (rural areas) require no PMI, even with 0% down. VA charges a funding fee, USDA charges a guarantee fee, but both are cheaper than PMI.
Best for:
Eligible veterans, active military, or buyers in USDA-approved areas.
Lender-Paid PMI (LPMI)
The lender pays your PMI in exchange for a slightly higher interest rate. You won't see PMI on your statement, but you'll pay more in interest over time.
Best for:
Buyers who want lower upfront costs and don't plan to keep the loan long-term.
80-10-10 Loan Caution
How to Remove PMI
If you already have PMI on a conventional loan, here's how to get rid of it:
Automatic Removal at 22% Equity
By law, your lender must automatically cancel PMI when your loan balance reaches 78% of the home's original value (22% equity), as long as you're current on payments.
Timeline example: With a 30-year loan at 6.5%, you'll hit 22% equity around year 11-12 through regular payments.
Request Removal at 20% Equity
You can request PMI cancellation once you reach 20% equity. You'll need to:
- ✓ Be current on payments (no 30-day late payments in past year)
- ✓ Submit a written request to your servicer
- ✓ May need to pay for an appraisal ($400-600) to prove current home value
- ✓ No subordinate liens (second mortgages) on the property
Remove Early Through Home Appreciation
If your home's value has increased significantly, you might reach 20% equity faster than your amortization schedule suggests.
Example:
You bought for $400k with 10% down ($360k loan). Two years later, your home is worth $440k. Your loan balance is $352k. Your equity is now $88k / $440k = 20%! Time to request PMI removal.
Refinance to Remove PMI
If you can't get PMI removed through your current lender, refinance into a new loan once you have 20% equity. Bonus: you might get a lower interest rate too.
When it makes sense: Rates have dropped, your credit has improved, or you've built equity through payments and appreciation.
Track Your Equity
PMI vs. FHA MIP: Key Differences
| Feature | Conventional PMI | FHA MIP |
|---|---|---|
| When required | Down payment < 20% | Always |
| Can be removed? | Yes, at 20-22% equity | Lifetime (if <10% down) |
| Typical cost | 0.5-1% annually | 0.55-0.85% + 1.75% upfront |
| Upfront fee | None | 1.75% of loan amount |
FHA Trap
Final Thoughts
PMI isn't necessarily a bad thing—it makes homeownership accessible with smaller down payments. But it's important to understand the costs and have a plan to remove it as soon as possible. Whether you choose to avoid it entirely with 20% down, remove it at 20% equity, or refinance out of an FHA loan, you can save thousands of dollars over the life of your mortgage.
Bottom line: Don't let PMI stop you from buying a home if you're ready. Just understand the cost, factor it into your budget, and have a strategy to eliminate it as your equity grows.
Calculate Your PMI Costs
Use our AI Mortgage Calculator to see exactly how PMI affects your monthly payment and total costs. Adjust your down payment to see when PMI disappears.
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