If you buy a home with less than 20% down, your lender will almost always require private mortgage insurance, or PMI. It's one of the most misunderstood line items in a mortgage, partly because of a counterintuitive fact: you pay for it, but it doesn't protect you. PMI protects the lender if you stop making payments. Understanding how it works — and how to make it go away — can save you hundreds of dollars a month.
Why lenders require PMI
When you put down less than 20%, the lender is taking on more risk. If you default early and they have to foreclose, the unpaid balance may exceed what the home sells for. PMI is an insurance policy that covers the lender for part of that loss. Because the risk is tied to how little equity you have, the rule of thumb is simple: less than 20% down means PMI; 20% or more means none.
How much PMI costs
PMI typically runs between 0.3% and 1.5% of the loan amount per year, billed monthly. The exact rate depends on your credit score, your down payment, and the loan type. A lower credit score or a smaller down payment pushes the rate up.
Here's a concrete example. On a $400,000 home with 10% down, you finance $360,000. At a 0.5% annual PMI rate, that's $1,800 a year, or $150 a month — on top of principal, interest, taxes, and insurance. That's money that builds no equity and benefits you in no way except making the loan possible.
The four ways PMI ends
- Automatic termination. Under the federal Homeowners Protection Act, your lender must automatically cancel PMI once your loan balance reaches 78% of the original home value, as long as you're current on payments. This happens on a preset schedule regardless of whether you ask.
- Borrower-requested cancellation. You can request cancellation once you reach 20% equity (an 80% loan-to-value ratio) based on the original value. This is faster than waiting for the 78% automatic point.
- Reaching 20% through appreciation. If your home's value rises, you may hit 20% equity sooner than your payment schedule alone would. You'll typically need to pay for an appraisal to prove the new value.
- Refinancing. If you refinance into a new loan and have 20% equity at that point, the new loan won't carry PMI.
How to avoid PMI in the first place
The cleanest way is a 20% down payment, but that's a high bar in many markets. Other approaches include lender-paid PMI (the lender covers it in exchange for a higher interest rate — sometimes cheaper over a short horizon), or a piggyback loan structure. Each has tradeoffs, and the math depends on how long you'll keep the loan.
See the number for your situation
The fastest way to understand PMI's impact is to plug your numbers in. Our mortgage calculator includes a PMI line that automatically applies when your down payment is under 20% and disappears when it isn't — so you can see exactly how much it adds to your monthly payment and how a larger down payment changes things.
Before you stretch for a home, it's also worth checking what you can realistically carry each month. Our guide to take-home pay by state shows how much actually lands in your account after taxes, which is the real budget your mortgage has to fit inside.
This guide is general information, not financial advice. PMI rules and rates vary by lender and loan type — confirm specifics with your lender.