PMI

What Is It

PMI (Private Mortgage Insurance) is required when a down payment is less than 20% of the home’s value. It protects the lender, not the borrower, in case of default — despite the buyer being the one who pays for it every month. It’s typically 0.5%–1.5% of the loan amount per year, added to the monthly mortgage payment. The exact rate depends on the down payment size and the borrower’s credit profile — a smaller down payment or lower credit score generally means a higher PMI rate, since the lender is taking on more risk either way.

Why It Matters

PMI isn’t permanent. By law (the Homeowners Protection Act), it’s automatically removed once the loan balance reaches 78% of the home’s original value, and a borrower can request removal once it hits 80% — as long as payments are current. This means PMI is a temporary cost tied directly to how much equity has been built, not a fixed fee for the life of the loan — worth knowing so nobody assumes they’re stuck paying it for 30 years.

Rising home values can also get there faster than the payment schedule alone would — if the home appreciates, equity can cross the 80% threshold well before amortization would get there on its own, though usually a new appraisal is needed to prove it to the lender.

Quick Example

A $300,000 loan with a 0.75% annual PMI rate costs $300,000 × 0.75% ÷ 12 = $187.50 per month. That cost disappears automatically once the balance drops to 78% of the original home value — sooner if extra principal payments are made along the way. Over several years, that $187.50 a month adds up to real money that a 20%-down buyer never pays at all — part of why some buyers weigh a larger down payment specifically to skip PMI, not just to shrink the loan.

Try It Yourself

Model your own loan amount and down payment to see when PMI would drop off.

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