PMI Explained: What It Costs and How to Avoid It

Published July 23, 2026 · 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 PMI actually is

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.

How to avoid it

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."

How to get rid of it

The good news is that conventional PMI is not forever. Once you have built enough equity, you can shed it. 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.

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.

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.

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