For many first-time homebuyers, saving for a down payment is one of the biggest hurdles to homeownership. If you’ve started researching mortgages, you’ve probably come across the term PMI, or Private Mortgage Insurance.
PMI often gets a bad reputation because it’s an added cost, but it has helped millions of people buy homes sooner instead of waiting years to save a 20% down payment.
Here’s what PMI is, how it works, and when you can stop paying for it.
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance, commonly called PMI, is insurance that protects the lender—not the borrower—if a homeowner stops making mortgage payments.
PMI is typically required when you buy a home with a conventional loan and put down less than 20% of the home’s purchase price.
Although PMI doesn’t provide direct protection for you, it allows lenders to offer mortgages with smaller down payments, making homeownership more accessible.
When Do You Have to Pay PMI?
In most cases, PMI is required when your down payment is less than 20% on a conventional mortgage.
For example:
- Purchase price: $300,000
- Down payment: 10% ($30,000)
- Mortgage amount: $270,000
Because the down payment is below 20%, PMI would likely be required.
The good news is that you don’t need to save a full 20% to buy a home. Many buyers qualify with down payments as low as 3% to 5%, depending on the loan program.
How Much Does PMI Cost?
The cost of PMI depends on several factors, including:
- Your credit score
- The size of your down payment
- The loan amount
- The type of mortgage
Most homeowners pay between 0.2% and 2% of the original loan amount per year, though many borrowers fall closer to the lower end of that range with strong credit and larger down payments.
For example, on a $300,000 mortgage:
- 0.5% PMI: About $1,500 per year (approximately $125 per month)
- 1% PMI: About $3,000 per year (approximately $250 per month)
Your lender will provide an estimate before you close so you’ll know exactly what to expect.
How Is PMI Paid?
There are several ways PMI may be structured:
- Monthly PMI: The most common option, added to your monthly mortgage payment.
- Upfront PMI: A one-time premium paid at closing.
- Lender-paid PMI: The lender covers the insurance cost in exchange for a slightly higher interest rate.
Your lender can explain which option best fits your financial goals.
Can You Remove PMI?
Yes. One of the biggest misconceptions about PMI is that you’ll pay it for the life of the loan.
For conventional loans, PMI can usually be removed once you’ve built enough equity.
You may be able to remove PMI when:
- Your mortgage balance reaches 80% of your home’s original value (you can request removal).
- Your loan reaches 78% loan-to-value, at which point the lender is generally required to remove PMI automatically if you’re current on your payments.
- Your home’s value has increased significantly, allowing you to qualify for PMI removal based on a new appraisal.
Making extra principal payments can also help you reach the required equity sooner.
Is PMI Worth It?
While no one enjoys paying an extra monthly expense, PMI can be a smart financial tool.
Consider this example:
Suppose you’re able to save $10,000 each year. If you wait to reach a 20% down payment on a $350,000 home, it could take several more years before you’re ready to buy.
During that time:
- Home prices may continue to increase.
- Interest rates could change.
- Rent payments continue without building home equity.
In many situations, paying PMI for a few years may cost less than waiting to purchase a home.
Every buyer’s situation is different, which is why it’s important to compare the numbers before making a decision.
PMI vs. FHA Mortgage Insurance
PMI applies to conventional loans, but FHA loans use a different type of mortgage insurance called Mortgage Insurance Premium (MIP).
Some key differences include:
| PMI | FHA MIP |
| Used with conventional loans | Used with FHA loans |
| Often removable after building enough equity | May last much longer, depending on your loan |
| Cost varies based on credit score and down payment | Cost is determined by FHA guidelines |
If you’re comparing loan options, understanding these differences can help you choose the mortgage that’s right for you.
How Kohler Credit Union Can Help
Buying a home is one of the biggest financial decisions you’ll make, and understanding every part of the mortgage process can make you feel more confident.
At Kohler Credit Union, our mortgage lending team takes the time to explain your financing options, estimate your monthly payments, and help you understand costs like PMI before you close.
Whether you’re buying your first home, moving into a larger home, or refinancing, we’re here to help you find a mortgage that fits your budget and long-term goals.
Key Takeaways
- PMI is typically required on conventional loans when your down payment is less than 20%.
- PMI protects the lender but allows buyers to purchase a home with a smaller down payment.
- The cost of PMI depends on factors such as your credit score, loan amount, and down payment.
- PMI is usually temporary and can often be removed once you’ve built enough home equity.
- Working with a trusted mortgage lender can help you understand your options and determine the best path to homeownership.
Homeownership may be closer than you think. Understanding how PMI works can help you make informed decisions and move forward with confidence.
*Information in our blog posts are made available to you as self-help tools for your independent use. We cannot and do not guarantee their accuracy, their applicability to your circumstances or guarantee of credit. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.