Key takeaways:
- PMI typically costs 0.2% to 2% of the loan amount per year, depending on several factors.
- The monthly cost is added directly to your mortgage payment.
- You can remove PMI once you reach 20% equity in your home.
Private mortgage insurance (PMI) is often required when a borrower puts down less than 20% on a conventional home loan. While it helps lenders mitigate risk, it adds an extra monthly cost to your mortgage payment. Understanding how much PMI costs and how it’s calculated can help you make smarter decisions when budgeting for your home.
What is PMI?
PMI, or private mortgage insurance, is a type of insurance that protects the lender — not you — if you stop making payments on your mortgage. It’s usually required when you make a down payment of less than 20% on a conventional loan.
PMI reduces the lender’s risk and makes it possible for more people to qualify for a mortgage with a lower upfront investment.
PMI is not the same as homeowners insurance or mortgage protection insurance. It won’t cover your house in a disaster or make payments on your behalf. It’s strictly for the lender’s protection. That said, paying PMI can be a worthwhile tradeoff if it helps you buy a home sooner.
How is PMI calculated?
The cost of PMI depends on several factors, including:
- Your loan amount
- Your down payment size
- Your credit score
- The loan type (fixed or adjustable rate)
- The insurer’s pricing model
Most borrowers pay between 0.2% and 2% of the original loan amount per year. This premium is typically divided by 12 and added to your monthly mortgage payment.
For example, on a $300,000 mortgage, if your PMI rate is 0.5%, your annual PMI cost would be $1,500. That breaks down to $125 per month
Here’s how typical PMI costs might look based on different loan amounts and rates:
Some lenders may also offer a one-time upfront PMI payment or build it into your loan rate (called lender-paid PMI), which can change how much you pay and when.
How does PMI affect your total mortgage payment?
To understand how PMI affects your monthly payment, it’s helpful to know that your mortgage payment is typically made up of:
- Principal
- Interest
- Taxes
- Homeowners insurance
- PMI (if applicable)
In other words, PMI adds another layer to your monthly cost. While it’s not permanent, it can increase your total payment by hundreds of dollars per month depending on your loan size and rate.
Let’s take an example:
- $400,000 loan
- 5% down payment ($20,000)
- 0.75% PMI rate
- 6.5% interest rate
- $4,000/year in property taxes
- $1,200/year in homeowners insurance
Monthly costs might look like this:
- Principal + Interest: ~$2,408
- Taxes: ~$333
- Insurance: ~$100
- PMI: ~$237
- Total estimated monthly payment: $3,078
Removing PMI from the equation would reduce the monthly payment to $2,841 — and yield meaningful savings over time.
How can you avoid PMI?
There are a few ways to avoid paying PMI altogether, or reduce how long you have to carry it.
- Put down 20% or more: The most straightforward option is to make a down payment of at least 20% on a conventional loan. This eliminates the lender’s requirement for PMI.
- Choose a loan program that doesn’t require PMI: Government-backed loans like VA loans (for veterans and active-duty service members) don’t require PMI, even with no down payment. USDA loans also skip PMI, though they have other forms of insurance.
- Use lender-paid PMI (LPMI): With LPMI, the lender pays the mortgage insurance premium on your behalf — but charges you a higher interest rate in return. This can reduce your monthly cost, but may cost more over time.
- Piggyback loans (80/10/10): This involves taking out a second mortgage to cover part of your down payment, letting you avoid PMI. For example, you could finance 80% with a primary mortgage, 10% with a second loan, and make a 10% down payment.
When can PMI be removed?
One of the benefits of conventional loans is that PMI doesn’t have to last forever. You can remove it in the following ways:
- Automatic cancellation at 78% LTV: Lenders are legally required to cancel PMI automatically once your loan balance reaches 78% of the home’s original value (loan-to-value ratio or LTV), assuming you’re current on payments.
- Request cancellation at 80% LTV: You can request removal sooner — once you reach 80% LTV — by submitting a written request, showing a good payment history, and possibly ordering a new home appraisal to confirm your home’s value.
- Refinance your loan: If your home has appreciated significantly or you’ve paid down the balance quickly, refinancing into a new loan without PMI might save you money. Just be sure to factor in the costs of refinancing.
Is PMI worth it?
That depends on your financial goals and timeline. While PMI increases your monthly costs, it also lets you buy a home without waiting years to save a 20% down payment. In markets where home values are rising quickly, getting into a home sooner — even with PMI — can help you start building equity now.
Consider PMI worth it if:
- You have stable income and can comfortably afford the monthly payments
- You expect to stay in the home long enough to cancel PMI or refinance
- You don’t have enough saved to make a 20% down payment, but don’t want to wait
It may be less appealing if:
- You’re already stretching your budget
- You qualify for a no-PMI loan alternative like a VA or USDA loan
- Your mortgage payment is significantly higher with PMI
Ultimately, it’s a personal decision — but understanding the numbers can help you make the right call.
Deciding what’s right for you
PMI can add anywhere from $100 to several hundreds to your monthly mortgage payment, depending on your loan size, credit profile, and insurance rate. While it’s not ideal to pay extra, PMI opens the door to homeownership for millions of buyers who don’t have 20% saved.
Before deciding, use a mortgage comparison tool to see how different down payment amounts, credit scores, and PMI rates affect your total cost. And remember, PMI isn’t forever — you’ll gain equity over time and have the option to remove it.
Ready to crunch the numbers?
Use our mortgage comparison tool to see how PMI affects your monthly payment — and find a lender who can offer you the best deal based on your credit and goals. Get started today and take one step closer to homeownership.