What is PMI (Private Mortgage Insurance)?

If you're buying a home with a conventional loan and putting down less than 20%, you'll likely have to pay for Private Mortgage Insurance (PMI). But what exactly is it, and how does it affect your monthly payments?

What Does PMI Do?

PMI is an insurance policy that protects the lender—not you—in case you default on your mortgage. Because a smaller down payment represents a higher risk for the lender, PMI is required to offset that risk.

How Much Does PMI Cost?

The cost of PMI varies depending on several factors, including:

• Your credit score: A higher credit score usually means lower PMI premiums.
• Your down payment amount: The closer you are to 20%, the lower your PMI will be.
• The loan type: Fixed-rate vs. adjustable-rate mortgages can have different PMI costs.

On average, expect to pay between 0.5% and 1.5% of the original loan amount per year in PMI. For a $300,000 loan, this translates to roughly $125 to $375 per month added to your mortgage payment.

How to Avoid or Remove PMI

1. Put Down 20%

The most straightforward way to avoid PMI entirely is to make a down payment of at least 20% of the home's purchase price.

2. Reach 20% Equity

Once you've paid down your mortgage balance to 80% of the home's original value, you can request that your lender cancel your PMI. By law, lenders must automatically terminate PMI when your balance reaches 78% of the original value.

3. Refinance

If your home has increased in value significantly since you bought it, you might have reached 20% equity sooner than expected. Refinancing your mortgage based on the new, higher appraised value can eliminate PMI.