PMI

PMI is insurance you pay for and do not benefit from, and it is what lets a buyer with a smaller down payment borrow at all. A lender that advances more than 80% of a home's price is exposed to a loss if the borrower stops paying and the sale of the house does not cover the balance, so on a conventional loan it requires the borrower to buy a policy that pays the lender in that case. The premium is quoted as a yearly percentage of the loan amount and charged monthly with the mortgage payment. PMI is temporary by design: it can be cancelled at your request once the balance reaches 80% of the home's original value, and the lender must remove it on its own at 78%, as long as payments are current.

In a sentence

• "With 10% down, PMI adds $120 a month to the payment until the balance reaches 80% of the price, which takes about eight years."
• "PMI protects the lender, not you; homeowners insurance is the policy that protects the house."
• "Put 20% down and there is no PMI at all."

How it works

1. The lender compares the loan to the home's value at closing, the purchase price or the appraisal, whichever is lower. A loan above 80% of it carries PMI on a conventional mortgage.
2. The insurer sets a rate, quoted as a percentage of the loan per year, commonly between a few tenths of a percent and about 1.5%, higher for a smaller down payment or a lower credit score.
3. The yearly premium is divided by twelve and collected with the mortgage payment, usually through the escrow account.
4. The premium ends when the balance reaches 80% of the original value. You can request cancellation at that point, on the amortization schedule or earlier through extra payments, with a clean payment history. Some lenders also accept a new appraisal showing the home has risen in value, with rules of their own.
5. At 78% the lender removes it automatically, on the schedule, without a request.

Monthly PMI = loan amount × yearly PMI rate ÷ 12

Government-backed loans carry their own mortgage insurance, with their own rules for when, or whether, it ends.

An example

A $320,000 home, a 30-year loan at 6.5%, and PMI at 0.5% of the loan a year, the example's inputs, with the same PMI rate applied to every down payment for comparison.

The 80% line is $256,000 in every row, because it is set by the price, not the loan. The 10% buyer pays $120 a month for 95 months before asking for cancellation, and $13,080 by payment 109 if they wait for the automatic removal at 78%. Adding $200 a month to that loan's payment reaches the 80% line after 60 payments instead of 95, and cuts the PMI paid to $7,200.

Why it matters

PMI is the price of buying with less than 20% down, and the decision it belongs to is whether to buy now or save longer. On the example's 10% loan the price is $11,400 over about eight years, against the years of rent paid while saving the other $32,000 and whatever home prices do in the meantime; neither answer is right for every household, but the figure should be in the comparison. The mistake it prevents, once you have it, is paying it longer than you must. The premium does not end on its own until 78%, and a borrower who never asks at 80%, or who has paid extra and reached 80% early, pays for months that a request would have avoided.

PMI versus homeowners insurance

PMI protects the lender; homeowners insurance protects you and the house. A homeowners policy pays to repair or rebuild after a fire or storm and covers liability if someone is hurt on the property, it is required by every lender for the life of the loan and worth keeping after it, and it is the policy you would buy without a lender at all. PMI pays the lender part of its loss if you default and the foreclosure sale falls short, it exists only while the loan is above 80% of the home's original value, and it pays you nothing. Both are usually collected through escrow, which is why they are confused, and only one of them disappears.

Common questions

Is PMI the same as mortgage insurance on a government-backed loan? No. PMI is private insurance on a conventional loan, and it ends at 78% to 80% of the original value. Government-backed loans carry their own mortgage insurance with different premiums and different rules for when, or whether, it ends.

How do I get rid of PMI? Ask the lender in writing once the balance is at or below 80% of the home's original value, whether by the schedule or by extra payments, with payments current; the lender removes it on its own at 78%. Some lenders accept a new appraisal showing the home's value has risen, and refinancing into a loan at or under 80% of the current value ends it too.

How much is PMI? A yearly percentage of the loan amount, commonly between a few tenths of a percent and about 1.5%, set by the down payment and the credit score and divided into monthly charges. On a $288,000 loan at 0.5% a year, that is $1,440 a year or $120 a month.

Is it worth paying PMI to buy sooner? It depends on how long the extra saving would take and what rent and prices do in the meantime. Run the cost of PMI over the years until 80% against the rent paid while saving the larger down payment; the learn article on saving a down payment lays out the comparison.

Does PMI go toward the loan? No. It is a premium paid to an insurer, and none of it reduces the balance, builds equity or comes back to you.

Go deeper

• The Mortgage calculator estimates the full monthly payment on a home, principal and interest plus property tax, insurance, HOA dues and PMI, with PMI charged while the down payment is under 20%.
• How to save for a down payment while renting sizes the target from the price and the loan type's minimum, and runs the tables at 5%, 10% and 20% down.