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For conventional mortgages, private mortgage insurance (PMI) generally costs around 0.2% to 2% of the loan amount per year—but can sometimes be much more. The exact amount you'll pay could depend on the type of loan, the insurance provider, your credit scores and your loan-to-value (LTV) ratio. Here's a closer look at how PMI can impact your total mortgage cost, and how you may be able to save money by canceling your PMI.
How PMI Works
PMI is an insurance policy that protects lenders from borrowers who miss payments. You'll typically pay PMI if you put down less than 20% when you take out a conventional loan to buy a house. But it's also one of the few ways to get a loan that's not backed by the government if you want to make a low down payment.
If your lender requires PMI on your loan, you'll usually pay the premium as part of your monthly mortgage bill. Some lenders may also give you the option of paying the entire amount upfront, or paying some amount upfront and some with your monthly payment.
Lenders may also offer PMI-free conventional mortgages with down payments of less than 20%. These loans could have lender-paid private mortgage insurance (LPMI), however, and you may wind up with a higher interest rate instead.
While PMI will increase your monthly payment, it's not all bad. Unlike mortgage insurance requirements on certain government-back loans, such as the mortgage insurance premium (MIP) on Federal Housing Authority (FHA) loans, you don't have to pay PMI for the lifetime of your loan. It may be automatically canceled by your lender, and there are several ways to proactively get rid of it. More on that below.
The Real Cost of PMI
While PMI will increase the initial cost of your monthly payments, it could be a worthwhile tradeoff. You might be able to purchase a home sooner if you don't need to put 20% down. Or, you may be able to buy a larger or nicer home rather than making a large down payment.
You could also compare a conventional loan with PMI to a government-backed mortgage loan with MIP to see which offers the lowest monthly payment. A 2021 report from the Urban Institute shows the initial monthly payments for a conventional loan with PMI and an FHA loan with MIP based on borrowers' down payments and credit scores.
| PMI vs. MIP: Monthly Mortgage Payments | ||||
|---|---|---|---|---|
| 3.5% down | 5% down | 10% down | 15% down | |
| Conventional loan with PMI (620-639 credit score) | $1,604 | $1,476 | $1,300 | $1,130 |
| FHA loan with MIP (620-639 credit score) | $1,329 | $1,298 | $1,229 | $1,161 |
| Conventional loan with PMI (760+ credit score) | $1,197 | $1,165 | $1,126 | $1,005 |
| FHA loan with MIP (760+ credit score) | $1,329 | $1,298 | $1,229 | $1,161 |
Source: The Urban Institute
The monthly figures are for a $275,000 home and the amounts don't account for some expenses, such as homeowners insurance or property taxes.
In general, if you're not putting much down or you don't have good credit, an FHA loan may have lower monthly payments. But you could be better off with a conventional loan and PMI if you have a good credit score or can afford a larger down payment.
You may be able to avoid paying for mortgage insurance with other types of government-backed mortgages, such as U.S. Department of Agriculture (USDA) loans and loans through the Department of Veterans Affairs (VA). But you could pay upfront or monthly fees instead. If you qualify for either type of loan, you'll want to consider the upfront and monthly costs for these as well.
Also consider how long you plan on living in the home and whether you're likely to refinance your mortgage. An FHA loan's insurance premiums could remain for the life of the loan, which may increase your long-term costs. But there are several ways to cancel your PMI and lower your monthly payment.
How to Cancel PMI
You may need to pay a PMI premium when you first buy your home, but there are also four ways to get rid of PMI:
- Automatic cancellation: By law, your mortgage servicer can't require you to pay for PMI forever. It must automatically cancel the policy when you're scheduled to reach 22% equity (in other words, the principal balance is 78% of the home's original value), or when you're halfway through the repayment term. The timeline is based on the original loan's repayment schedule and value.
- Request cancellation: You may request a cancellation a little earlier—once you reach 20% equity based on the home's original value. However, you may need to meet other qualifications, such as not having a second mortgage, and you may have to pay for an appraisal.
- Reappraise your home: While the above methods depend on the home's original value, you may be able to pay for a reappraisal and request the PMI be canceled based on the current value and your equity. This can be beneficial if your home has quickly appreciated in value or if you've made home improvements that increased its value.
- Refinance your mortgage: Another option is to replace your mortgage with a new one. If you have at least 20% equity based on the current valuation, you may qualify for a conventional loan without PMI.
You may want to get rid of PMI as soon as possible to lower your mortgage payments. There's little downside, as the insurance doesn't protect borrowers.
Focus on Your Credit and Down Payment
As you prepare to buy a home, consider how much you can afford to put down and whether you can improve your credit before applying for a loan. Higher down payments and credit scores can help you qualify for a mortgage with more favorable terms. And, if you need to get PMI, they could lead to paying less in premiums. You can check your Experian credit report for free online. After creating your account, you can also get personalized recommendations for improving your credit based on your unique credit profile.