PMI Explained: What Private Mortgage Insurance Costs, How to Get Rid of It, and Whether to Wait for 20% Down

Somewhere in every first-time buyer's loan estimate there's a line that wasn't in the mental budget: mortgage insurance, $140 a month, $190 a month, sometimes more. It's easy to read it as a penalty for not having a bigger down payment, and plenty of buyers delay a purchase for years to avoid it. That's sometimes the right call and often the wrong one. This guide explains what PMI actually is, what it costs, how it goes away, and how to think about the trade-off honestly.

What PMI is and who it protects

Private mortgage insurance is a policy your lender requires when you put down less than 20% on a conventional loan. You pay the premium, but the policy protects the lender, not you. If you default and the foreclosure sale doesn't cover the balance, the insurer covers part of the lender's loss.

That sounds like a bad deal until you see what it buys you. Without PMI, lenders would only make low-down-payment loans at much higher rates, or not at all. PMI is the mechanism that lets someone with 5% or even 3% down get a conventional mortgage at close to the same rate as someone with 20%. It's the price of borrowing 95% of a house's value, and it's temporary.

What it costs

PMI is quoted as an annual percentage of the loan amount, typically between 0.3% and 1.5%, divided into twelve monthly payments and added to your mortgage payment. Where you land in that range depends mostly on two things:

• Your credit score. This matters more than most buyers expect. A 760+ score might pay 0.3% to 0.5%; a 640 score on the same loan might pay 1.2% or more.
• Your down payment. 15% down is cheaper to insure than 5% down, which is cheaper than 3%.

Loan size, debt-to-income ratio, and whether the property is a condo or a second home also nudge the rate.

A worked example: a $280,000 house, 5% down ($14,000), $266,000 loan, 740 credit score. At roughly 0.55% annually, PMI is about $122 a month. Same house with 10% down and a 680 score at 0.75%: about $158 a month. Your loan officer can quote your exact figure once they have your score and down payment; ask for it early, because it belongs in your affordability math, not as a surprise on the closing disclosure.

The ways you can pay it

Most buyers pay borrower-paid monthly PMI — the line item above. There are alternatives worth knowing:

• Single-premium PMI: one lump sum at closing (often 1% to 2% of the loan) instead of a monthly charge. It lowers your payment and can be worth it if you'll stay in the house a long time, but the money is gone even if you sell in two years, and sellers can sometimes be negotiated into paying it as a closing credit.
• Lender-paid PMI: the lender covers the insurance and charges you a slightly higher interest rate instead. There's no separate line to cancel, but the higher rate lasts the life of the loan, so it only makes sense if you plan to refinance or sell before you'd have hit 20% anyway.
• Split premium: part up front, part monthly.

Unless you have a clear reason for one of the others, monthly PMI is the default because it's the only version that simply disappears once you've built equity.

PMI vs. FHA mortgage insurance: not the same thing

This trips up a lot of buyers comparing loan types. FHA loans also carry mortgage insurance, but it's a different product with different rules:

The practical upshot: a buyer with strong credit and less than 20% down will usually pay less for conventional PMI and be able to cancel it, which is why lenders steer good-credit buyers toward conventional even at 3% or 5% down. A buyer with weaker credit may find FHA's flat, non-credit-based premium is the cheaper monthly number — but they're signing up for it until they refinance. VA loans have no monthly mortgage insurance at all, which is one of the biggest reasons eligible veterans should price one first.

How PMI goes away

This is where conventional PMI earns its keep. Under the federal Homeowners Protection Act, you have three routes to getting rid of it, and they're based on your original purchase price or appraised value (whichever was lower when you closed) unless you take the fourth route.

1. Automatic termination at 78%

When your loan balance reaches 78% of the original value on the amortization schedule — meaning by making scheduled payments, not extra ones — the lender must cancel PMI automatically, as long as you're current. You don't have to do anything. On a 30-year loan with 5% down, that typically happens around year 10 to 11.

2. Request cancellation at 80%

You can ask sooner. Once your balance hits 80% of original value, you can request cancellation in writing. The lender can require that you're current, have a good payment history (no 30-day lates in the past year, no 60-day lates in the past two), and that there are no second liens on the property. On the same 5%-down loan, 80% arrives about a year before 78% does — worth a letter.

If you've been making extra principal payments, you can reach 80% much faster. The lender counts the actual balance, not the schedule, for a request — so prepaying is a legitimate way to shorten your PMI life.

3. The midpoint

If for some reason neither of the above has triggered — say the loan was interest-only or the balance hasn't dropped — PMI must end at the midpoint of the loan term regardless (year 15 on a 30-year loan), provided you're current.

4. A new appraisal, when the market did the work

The three rules above use your original value. If home prices in your area have risen, your current equity may be over 20% long before your balance says so. Most servicers will cancel PMI based on a new appraisal that you pay for (usually $450 to $700), subject to their own seasoning rules — commonly at least two years since closing for 75% loan-to-value, or five years for 80%, and often a requirement that any improvements you're counting were substantial. Call your servicer and ask for their specific PMI-removal-by-appraisal policy before you spend the money; policies vary and they're not required to offer this route at all.

For a buyer who purchased in 2020 or 2021 and watched values climb, this has been the fastest exit by a wide margin. If you're in that situation and still paying PMI, it's a phone call worth making this week.

Should you pay PMI or wait for 20%?

This is the real question, and the honest answer is that PMI is usually a worse villain in the imagination than on paper. Here's how to think it through.

What waiting actually costs. Say you have 5% saved on a $280,000 house and it would take three more years to reach 20%. In that time you're paying rent — say $1,600 a month, or about $57,600 — that builds no equity. If the house appreciates even a modest 3% a year, it costs roughly $306,000 in three years; your 20% is now $61,200 instead of $56,000, and you've been chasing a moving target. Meanwhile, the buyer who took the 5% loan paid about $122 a month in PMI — roughly $4,400 over those three years — and has been paying down principal and capturing the appreciation the whole time.

When waiting makes sense. The math flips when your situation is different from that example:

• Your credit score is low enough that PMI would be north of 1% — improving the score for a year may cut both PMI and your rate.
• You'd be at 3% down with no reserves left. The problem isn't PMI; it's having nothing in the bank when the water heater fails. Build a cushion first.
• You're a few months, not a few years, from 20%, or from the 10% mark where PMI pricing drops noticeably.
• Prices in your market are flat or falling, so waiting isn't costing you appreciation.

The middle path. Don't treat 20% as the only threshold. PMI rates step down at 10% and 15% down, so if you can get from 5% to 10% by waiting six months, that's a real saving with a short delay. And remember that PMI is cancellable — the decision isn't "pay $122 a month forever," it's "pay $122 a month for a few years, then stop."

A useful frame: PMI is a fee for buying now with money you don't have yet. Whether it's worth it depends on what buying now gets you — and in most rising markets, that's a lot more than the fee.

Practical steps

1. Get your PMI quote alongside your rate when you're getting pre-approved. Compare the full monthly payment, not the rate alone.
2. Ask for conventional and FHA quotes side by side if your credit is in the middle. The cheaper one isn't always the one you'd guess.
3. Consider asking the seller to pay a single premium as part of your offer if it's a buyer's market — it costs them the same as a price cut and lowers your payment permanently.
4. Track your balance against 80% of your purchase price from day one. Put the date on a calendar. Servicers are required to cancel at 78%, but nobody will remind you at 80%.
5. Watch your local market. If values rise, price out an appraisal-based removal once you clear the seasoning period.

The bottom line

PMI is a temporary cost that lets you buy a house with less than 20% down at a normal rate. It typically runs a few hundred dollars a month or less, it's cheaper with better credit and a bigger down payment, and on a conventional loan it goes away — automatically at 78% of original value, on request at 80%, or sooner with an appraisal if your market has risen. Waiting years to avoid it usually costs more in rent and appreciation than the insurance ever would. The exceptions are real, but they're about reserves and credit, not about PMI itself.