PMI Explained: What It Costs and How to Avoid It

Published July 23, 2026 · Updated October 3, 2026 · 5 min read · By Ramanathan · Paired with the Affordability Calculator

If you buy a home with less than a fifth of the price as a down payment, your lender will almost certainly add a charge called PMI — private mortgage insurance. It is one of the most misunderstood lines on a mortgage statement, partly because it protects the lender while you pay for it. Knowing how it works, what it costs, and how to shed it can save you thousands. Factor it in when you size a purchase on the affordability calculator.

What is PMI (private mortgage insurance)?

PMI is an insurance policy that protects the lender, not you, against the risk that you default and the home sells for less than you owe. Lenders require it on conventional loans whenever your down payment is under 20% — that is, when the loan-to-value ratio (LTV) is above 80%. The logic is that a borrower with little equity is statistically more likely to walk away, so the lender insures against the shortfall and passes the premium on to you. You get nothing directly for the money; it simply makes the low-down-payment loan possible.

What it costs

PMI typically runs from about 0.3% to 1.5% of the loan amount per year, split into monthly payments added to your mortgage. The exact rate depends on your down payment and credit score — a smaller down payment and a lower score both push it higher. On a $300,000 loan, even a middle-of- the-road 0.7% is about $2,100 a year, or $175 a month, on top of principal, interest, taxes and insurance. Over the several years it often takes to reach 20% equity, that adds up to a serious sum for coverage that benefits the lender.

Across that range, on the same $300,000 loan:

PMI rate (a year)	Per year	Per month
0.3% (low end)	$900	$75
0.7% (middle of the road)	$2,100	$175
1.5% (high end)	$4,500	$375

How can you avoid paying PMI?

The cleanest way to avoid PMI is to put 20% down, but that is not always practical, and tying up that much cash has its own cost. A few alternatives exist. Some borrowers use a piggyback structure — a first mortgage for 80%, a second loan for part of the rest — to keep the first loan at 80% LTV and sidestep PMI, though the second loan carries its own (often higher) rate. Lender-paid PMI is another option: the lender drops the separate PMI line in exchange for a slightly higher interest rate, which can work out cheaper but is baked in for the life of the loan. And certain government-backed loans have their own insurance rules that differ from conventional PMI. Each route is a trade-off, so compare the true all-in cost rather than just chasing "no PMI."

The routes compare like this:

Route	How it avoids PMI	The trade-off
Put 20% down	Keeps the loan at 80% loan-to-value or below	Ties up a large amount of cash, which has its own cost
Piggyback structure	A first mortgage for 80% plus a second loan for part of the rest, keeping the first loan at 80% LTV	The second loan carries its own, often higher, rate
Lender-paid PMI	The lender drops the separate PMI line in exchange for a slightly higher interest rate	Can work out cheaper, but the higher rate is baked in for the life of the loan
Government-backed loans	They follow their own insurance rules, different from conventional PMI	Compare the true all-in cost rather than just chasing “no PMI”

How do you get rid of PMI once you have it?

The good news is that conventional PMI is not forever. Once you have built enough equity, you can shed it. Under the Homeowners Protection Act, you can request cancellation when your loan balance reaches 80% of the original value of the home, and by law the lender must automatically terminate PMI once the balance reaches 78%, provided you are current on payments. You can reach those thresholds faster by paying down principal ahead of schedule, and in a rising market a new appraisal showing higher value can get you there sooner still. It is worth tracking your balance and asking the moment you cross the line, because lenders do not always volunteer it before the automatic point.

How long that actually takes depends heavily on how much you put down. On a $400,000 home at 6.5% over 30 years, run purely through the amortization schedule (no home-price appreciation assumed, so this is the slow, worst-case timeline):

Down payment	Starting LTV	Months to 80% LTV (paydown only)
5%	95%	124 months (about 10.3 years)
10%	90%	95 months (about 7.9 years)
15%	85%	56 months (about 4.7 years)

Two things fall out of this. First, the gap between 5% and 15% down is enormous — over five extra years of PMI for putting down 10 points less. Second, any home-price appreciation shortens every one of these rows, since equity comes from the price going up as well as the balance going down; a new appraisal showing a higher value is often the fastest legitimate way to cross the line early. Run your own numbers on the mortgage calculator — its amortization schedule shows the running balance you would compare against your original purchase price.

Not all mortgage insurance is the same

One clarification worth making: PMI on a conventional loan is not the same as the mortgage insurance on some government-backed loans. FHA loans in the US, for instance, carry their own mortgage insurance premium that can last the life of the loan and is typically removed only by refinancing into a conventional mortgage — so "mortgage insurance" is not always cancellable the way conventional PMI is at 78% LTV. Before you assume you can drop the charge later, confirm which type your loan carries and exactly how it ends.

Feature	Conventional PMI	FHA mortgage insurance
Can you cancel it?	Yes: request cancellation at 80% of the original value; the lender must terminate it automatically at 78%	Not in the same way: it can last the life of the loan
How it typically ends	Your balance reaches the 80% or 78% threshold	Refinancing into a conventional mortgage

Is a low down payment with PMI ever worth it?

Sometimes, yes. Waiting years to save a full 20% means years of paying rent and potentially missing home-price appreciation. If buying sooner with PMI lets you lock in a home you would otherwise be priced out of, the temporary insurance cost can be a reasonable price for getting in — as long as you can comfortably carry the payment including PMI, and you have a plan to reach 20% equity and cancel it. The mistake is treating a low down payment as free; PMI is the cost, and it belongs in your monthly budget from day one.

The bottom line

PMI is not a scam, but it is not for you either — it is the price of borrowing with a small down payment. Budget for it honestly, aim to cancel it as soon as you cross 80% LTV, and weigh the alternatives before assuming 20% down is always the right call. When you model a purchase, remember that PMI, property tax and insurance all share the same monthly housing budget, so a home that looks affordable on principal and interest alone may be tighter than it appears. The affordability calculator is the place to stress-test that.

Size a purchase with PMI in mind:
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This guide uses US mortgage figures. See the US mortgage calculator & home loan hub for more US-specific calculators and guides.