When you’re shopping for a home, you may have in mind that you need to put 20% down on your purchase. However, you can buy a home with less than 20% down thanks to private mortgage insurance (PMI).
PMI is generally required on a conventional mortgage when your down payment is less than 20% of the home's purchase price. While PMI adds to your monthly housing costs, it can help you buy a home without waiting years to save a 20% down payment.
PMI is put in place to protect your lender, not you. If you stop making mortgage payments and the lender suffers a loss, PMI helps cover some of that loss. It doesn't protect you from foreclosure or make your mortgage payments for you.
In a Nutshell
Generally, PMI is required when you have a conventional mortgage with less than 20% down.
PMI commonly ranges from about 0.46% to 1.50% of the loan amount per year, although your actual rate depends on your circumstances.
You can typically request PMI cancellation when your principal balance reaches 80% of the home's original value, subject to eligibility requirements, and it usually terminates automatically when the balance is scheduled to reach 78% of the home's original value.
How Does Private Mortgage Insurance Work?
Lenders view a smaller down payment as a greater risk because you start the mortgage with less equity in the home. PMI reduces some of that risk by providing insurance coverage to the lender if you default.
Your lender typically arranges the PMI with a private mortgage insurance company, and you pay the premium. The most common arrangement is a monthly PMI payment added to your mortgage payment, although some loans may use an upfront premium or a combination of upfront and monthly premiums.
How To Find Your Rate
Your PMI costs should be disclosed as part of your mortgage paperwork. On the Loan Estimate, monthly mortgage insurance appears in the Projected Payments section. The Closing Disclosure also shows mortgage insurance as part of your projected monthly payment and can show upfront mortgage insurance costs when applicable.
This makes these documents useful tools for comparing loan offers. If you're considering multiple lenders, look at the complete monthly payment and closing costs – not just the interest rate.
How Much Is Private Mortgage Insurance?
There isn't one universal PMI rate. A typical range is about 0.46% to 1.50% of the loan amount per year, but your actual quote can fall outside that range.
Your PMI cost can be impacted by different factors, including:
Credit score
Down payment and loan-to-value (LTV) ratio
Loan amount
Loan type and term
The lender and private mortgage insurance provider
In general, a larger down payment and stronger credit profile can result in a lower PMI rate. But your lender's actual quote is what matters when you're comparing loan options.
How Is PMI Calculated?
Here’s how to calculate your estimated monthly PMI:
Loan amount × annual PMI rate ÷ 12 = estimated monthly PMI
For example, if you have a $300,000 mortgage and a hypothetical PMI rate of 1%, you'd pay:
$300,000 × 1% = $3,000 per year
$3,000 ÷ 12 = $250 per month
Here is how PMI might look in some different scenarios. These numbers are just examples. Your actual PMI premium may be different.
| Loan amount | 0.5% annual PMI | 1.0% annual PMI | 1.5% annual PMI |
|---|---|---|---|
| $200,000 | $83/month | $167/month | $250/month |
| $300,000 | $125/month | $250/month | $375/month |
| $400,000 | $167/month | $333/month | $500/month |
Illustrative examples only. Actual PMI rates and premiums vary by borrower and loan.
PMI vs. Waiting for a 20% Down Payment
The decision isn't necessarily as simple as "PMI is bad, so wait until you have 20% to put down." Waiting can reduce your loan amount and eliminate PMI, but it also means delaying your purchase and potentially tying up more of your savings in your home.
Consider a $350,000 home:
| 5% down | 20% down | |
| Down payment | $17,500 | $70,000 |
| Starting loan amount | $332,500 | $280,000 |
| PMI | Generally required | Generally not required |
| Cash remaining for emergencies | Potentially more | Potentially less |
A smaller down payment may let you keep more cash available for closing costs, moving expenses, repairs and an emergency fund. It will also mean a higher loan amount, and likely more interest paid over time.
On the other hand, a larger down payment means borrowing less and generally avoiding PMI. It can also mean waiting longer to purchase, which could result in higher market prices.
The right choice depends on your finances, how quickly you can save, your expected housing costs and how comfortable you are with the resulting monthly payment.
How Long Do You Have to Pay PMI?
PMI on a conventional mortgage isn't necessarily permanent. Under federal law, you can generally request cancellation once your mortgage principal balance reaches 80% of the home's original value, provided you meet applicable requirements. These can include having a good payment history, being current on the mortgage and having no certain junior liens.
Your principal balance – not the interest portion of your payments – is what reduces the mortgage balance used for this calculation. Making extra principal payments can therefore help you reach the cancellation point sooner. You can also reach an 80% LTV if your home value increases – or a combo of paying down the principal balance and value increase.
PMI generally must be automatically terminated when your principal balance is scheduled to reach 78% of the home's original value, as long as you're current on your payments. There are also rules for termination at the midpoint of the loan's amortization schedule in certain circumstances.
Your mortgage and servicer may have additional requirements, so contact your servicer when you think you may be eligible. If you're wondering how to remove private mortgage insurance sooner, ask your servicer what options are available under your specific loan.
Can You Avoid PMI Without Putting 20% Down?
A 20% down payment isn't the only way to avoid a charge specifically called PMI. That's because PMI applies to conventional loans. Other mortgage programs have their own forms of mortgage insurance or fees.
That doesn't necessarily mean another loan program will cost less. Compare the entire monthly payment, upfront costs, interest rate and long-term costs before choosing a loan. Here’s what you can expect with different loan types.
Conventional 97 Loans: As Little as 3% Down
Some conventional mortgage programs allow qualified buyers to put down as little as 3%.
Options include programs such as Fannie Mae's HomeReady® and Freddie Mac's Home Possible®. These loans generally require mortgage insurance when the down payment is below 20%, although some programs offer reduced mortgage insurance requirements or other benefits for eligible borrowers.
FHA Loans: As Little as 3.5% Down
FHA loans can allow eligible borrowers to purchase with as little as 3.5% down. Instead of conventional PMI, FHA loans have mortgage insurance premiums (MIP), including an upfront premium and an annual premium. The upfront MIP can generally be financed into the loan.
VA Loans: 0% Down for Eligible Borrowers
Eligible veterans, active-duty service members and certain surviving spouses may qualify for a VA-backed purchase loan with no down payment. VA loans don't require monthly mortgage insurance, although borrowers may have to pay a one-time VA funding fee unless they're exempt.
USDA Loans: 0% Down for Eligible Buyers
USDA guaranteed loans can offer eligible buyers in qualifying rural areas the opportunity to purchase with no down payment. Instead of PMI, USDA loans have a guarantee fee structure that currently includes a 1% upfront guarantee fee and a 0.35% annual fee. The upfront fee may be financed into the loan.
Should You Pay PMI to Buy a Home Sooner?
PMI can make homeownership possible before you've saved a 20% down payment. While it increases your monthly housing cost, it may allow you to buy sooner while keeping more of your savings available for emergencies and other expenses.
Before deciding, ask a lender to run the numbers for different down payments and loan programs. Compare the total monthly payment, cash needed at closing and how long you'll likely pay mortgage insurance.
If buying with PMI leaves you with a manageable payment and enough savings to handle the unexpected, it may be a reasonable part of your path to homeownership. You don't necessarily have to wait for 20% down to buy a home – you just need to make sure the complete loan fits comfortably within your budget.
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.