What Is PMI and How to Avoid It?

Private mortgage insurance, commonly known as PMI, is one of the least understood parts of a mortgage payment — and one of the most avoidable, with the right planning. Understanding when it applies, how much it typically costs, and how to get rid of it can save a meaningful amount of money over the life of a home loan.

What PMI Actually Protects

PMI protects the lender, not the borrower, in the event you default on a conventional loan with a smaller down payment. Because a smaller down payment means less equity cushion for the lender if they need to foreclose and resell the home, lenders require PMI to offset that added risk. It is important to understand: PMI does nothing to protect you personally if you fall behind on payments — it exists purely to reduce the lender’s risk.

When PMI Is Required

On a conventional mortgage, PMI is generally required whenever your down payment is less than twenty percent of the home’s purchase price, which means your loan-to-value ratio at closing is above eighty percent. Government-backed loans work differently: FHA loans require their own mortgage insurance premium, structured somewhat differently from conventional PMI, while VA loans do not require mortgage insurance at all, instead charging a one-time funding fee in most cases.

How Much PMI Typically Costs

PMI premiums vary based on your down payment size, credit score, and loan type, but commonly range from roughly 0.3% to 1.5% of the original loan amount annually, divided into monthly payments added on top of your regular mortgage payment. On a $350,000 loan, that could mean anywhere from around $88 to $438 a month, depending on your specific risk profile — a meaningful ongoing cost that is easy to overlook when comparing the appeal of a smaller down payment against the cost of PMI it triggers.

How to Avoid PMI Entirely

The most direct way to avoid PMI is putting down at least twenty percent of the purchase price, which keeps your loan-to-value ratio at eighty percent or below from the start. If a full twenty percent down payment is not feasible, some lenders offer piggyback loan structures — commonly an 80-10-10 arrangement, where a first mortgage covers eighty percent of the price, a second loan covers another ten percent, and the borrower brings the remaining ten percent as a down payment — which avoids PMI by keeping the primary mortgage’s loan-to-value ratio at eighty percent, though the second loan typically carries its own, often higher, interest rate.

How to Remove PMI Once You Have It

If you are already paying PMI, it does not have to last for the life of the loan. Under federal law, lenders are generally required to automatically cancel PMI once your loan balance reaches seventy-eight percent of the home’s original value, based on the original amortization schedule. You can often request cancellation earlier, once your balance reaches eighty percent of the original value, by contacting your lender directly — though this typically requires a good payment history and may require a new appraisal to confirm the home’s current value supports your equity claim.

Rising Home Values Can Speed Up Removal

If your home’s value has risen significantly since purchase — common in strong housing markets — you may reach eighty percent loan-to-value faster than your original amortization schedule would suggest, simply because the home is worth more relative to your remaining loan balance. In this situation, it is worth proactively contacting your lender to request a new appraisal and PMI removal, rather than waiting for the automatic cancellation point based on the original purchase price.

Weighing PMI Against a Larger Down Payment

Sometimes waiting longer to save a full twenty percent down payment, in order to avoid PMI entirely, means missing out on years of homeownership and potential appreciation while renting and saving. Whether it makes more sense to buy sooner with a smaller down payment and pay PMI temporarily, or wait and save for a larger down payment, depends on your specific market, how quickly you expect to reach eighty percent loan-to-value through paydown and appreciation, and how the monthly PMI cost compares to what you would otherwise pay in rent during the additional saving period.

The Bottom Line

PMI is a real, ongoing cost tied specifically to a smaller down payment on a conventional loan, but it is neither permanent nor unavoidable. A twenty percent down payment avoids it entirely, and if you are already paying it, understanding the rules around automatic and requested cancellation can help you get rid of it well before the life of the loan is over.