What is PMI and How to Avoid It

What PMI is (and who it protects)

Private Mortgage Insurance is an insurance policy required by most conventional lenders when the borrower's down payment is less than 20% of the home's purchase price. If you default on the loan, PMI pays the lender a portion of their loss. Notice: it protects the lender, not you. As the borrower, you pay the premiums but receive no direct benefit from the policy. PMI exists because lenders view low-down-payment loans as higher risk — if you have less equity, you're more likely to walk away in a downturn, and the lender recovers less from foreclosure.

How much does PMI cost?

PMI typically costs 0.5% to 1.5% of the loan amount per year, paid as part of your monthly mortgage payment. The exact rate depends on your credit score, loan-to-value ratio, and lender:

$300,000 loan with 1% PMI rate:
  Annual PMI:  $3,000
  Monthly PMI: $250

With good credit (760+), the rate might be 0.5%:
  Annual PMI:  $1,500
  Monthly PMI: $125

With lower credit (680), the rate might be 1.5%:
  Annual PMI:  $4,500
  Monthly PMI: $375

These aren't trivial amounts — $250/month over the 5-7 years it typically takes to build 20% equity totals $15,000–$21,000. Money spent on PMI builds zero equity.

When PMI is automatically canceled

The Homeowners Protection Act (HPA) of 1998 gives you legal rights around PMI cancellation for conventional loans. Your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price — based on your payment schedule, regardless of your home's current value. This happens automatically; you don't need to request it. You can also request cancellation when you reach 80% LTV based on original purchase price, if you have a good payment history (no 30-day late payments in the last year, no 60-day late payments in the last two years) and your home hasn't declined in value.

Strategies to avoid or eliminate PMI

• Put 20% down. The most straightforward approach. On a $400,000 home this means $80,000 upfront — high but it eliminates PMI entirely from day one and typically gets you a better interest rate.
• Piggyback loan (80-10-10). Take a first mortgage for 80% of the home value, a second mortgage (HELOC or home equity loan) for 10%, and put 10% down. You avoid PMI because the first mortgage is at 80% LTV. The second mortgage has a higher rate but may be cheaper than PMI, especially if you pay it off quickly.
• Lender-paid PMI (LPMI).The lender pays the PMI premium upfront in exchange for a higher interest rate on your loan. There's no separate PMI payment, but you're effectively paying it through the rate — and unlike standard PMI, the higher rate is permanent for the life of the loan. LPMI makes sense if you plan to sell or refinance within a few years.
• VA or USDA loans. If you qualify for a VA loan (active military, veterans, eligible spouses) or a USDA loan (certain rural and suburban areas), these programs offer zero down payment without PMI. FHA loans require a different type of insurance (MIP) that often lasts the life of the loan — less favorable than conventional PMI.
• Make extra payments to reach 80% faster.Every extra dollar paid toward principal reduces your balance. Once you reach 80% LTV based on the original purchase price, request PMI cancellation. If your home has appreciated significantly, get an appraisal — if the current value puts you below 80% LTV, you may be able to cancel PMI based on the new value (some lenders allow this after 2 years; check your loan terms).

Is PMI always bad?

Not necessarily. PMI allows you to buy a home with less than 20% down, which means you can stop renting sooner, begin building equity, and lock in a home price before further appreciation. In markets where home prices rise faster than the cost of PMI, buying early with PMI can be financially better than waiting to save a full 20% down payment. The decision depends on your local market, your savings rate, and alternative uses for the capital you'd put into a larger down payment. Run the numbers for your specific situation using our mortgage calculator.