What is PMI insurance and when does it apply?

Private mortgage insurance (PMI) is insurance for the mortgage lender. It doesn’t protect you or your home in any way, but you still must pay PMI as a condition of conventional mortgage loans if your down payment is less than 20%. For example, if the price of your new home is $200,000 and you’re only able to pay $7,000 up front, then you pay PMI because your down payment is only 3.5% of your home’s purchase price. Lenders view a mortgage loan with a smaller down payment as a riskier investment, and mortgage insurance provides a safeguard for the lender if you default on the loan.

Down payment < 20% of the purchase price = PMI

Down payment > 20% of the purchase price = No PMI

How much does PMI cost?

PMI costs vary, depending on your loan type, but expect to pay between 1% and 3% of your home’s purchase price. Based on a $200,000 purchase price with a $10,000 down payment, assuming your APR is 4% and the mortgage insurance rate is 2%, your PMI amount would be $317/month.

How is PMI paid?

PMI is usually included in your mortgage payment. You may choose to have lender-paid mortgage insurance, which means you pay PMI in one lump sum at the start of your loan or your lender pays your PMI in exchange for a higher interest rate on your mortgage. Understand, if you choose the latter option, you’ll pay more each month with a higher APR than you would including PMI in your monthly mortgage payment or paying in full.

Can I choose the mortgage insurance company?

No. Because PMI protects the lender only, your lender gets to select the company that will provide mortgage insurance.

Mortgage insurance vs home insurance

Mortgage insurance doesn’t cover you or your home. It’s not a substitute for a home insurance policy, which protects the structure of your home, personal belongings, and your pocketbook in case you’re financially liable for something. Home insurance is typically required by your lender no matter the size of your down payment and is highly recommended even after you pay off your home. Mortgage insurance, however, is only required if you’re unable to make a 20% down payment on a new home loan or refinance.

If you’re going through the home-buying process and have additional questions about insurance, check out our guide to home insurance for first-time buyers.

Ways to avoid PMI

Remember: mortgage insurance covers your lender, not you. That makes it an expense you’ll want to avoid, if possible. Here’s how:

  • Put 20% or more down: If you have a conventional loan, you won’t have to pay PMI with a down payment of at least one-fifth of the home’s purchase price.
  • Take a second mortgage: Often referred to as "piggybacking", you can cap your first mortgage at 80% of your home’s value and use a second mortgage to finance the rest. Lenders usually require a down payment of at least 10% for this option.
  • Choose a government-insured loan: If you’re eligible for a VA loan, backed by the U.S. Department of Veteran Affairs, mortgage insurance isn’t required. Same goes for USDA (United States Department of Agriculture) loans. Keep in mind, FHA loans require mortgage insurance.
  • Cancel PMI when possible: Once the balance of your mortgage loan falls below 80% of your home’s value or purchase price, you can look to refinance your mortgage or contact your lender about eliminating PMI.