If your down payment on a conventional loan is less than 20% of the home’s price, your lender will likely require private mortgage insurance, or PMI. It’s a common source of confusion — and extra cost — for many first-time buyers.
What PMI Actually Protects
PMI does not protect you, the borrower. It protects the lender in case you default on the loan. Because a smaller down payment means more risk for the lender, PMI offsets that risk by providing insurance coverage.
How Much PMI Costs
PMI typically costs between 0.5% and 1.5% of the original loan amount per year, divided into monthly payments and added to your regular mortgage bill. The exact rate depends on your credit score, down payment size, and loan type.
How to Avoid PMI
- Put down 20% or more on a conventional loan.
- Choose lender-paid PMI, where the lender covers the cost in exchange for a slightly higher interest rate.
- Use a piggyback loan, splitting your financing into two loans to avoid crossing the PMI threshold.
- Consider a VA loan if you’re eligible, since VA loans don’t require PMI at all.
When PMI Goes Away
On conventional loans, you can typically request PMI removal once you reach 20% equity, and it’s automatically canceled at 22% equity under federal law, based on your original purchase price and payment schedule.
The Bottom Line
PMI isn’t necessarily something to fear — it can be the bridge that lets you buy a home sooner with a smaller down payment. Just factor its cost into your monthly budget and know how to get rid of it once you build enough equity.