Private Mortgage Insurance: Cost, Removal, and Strategic Considerations
Private mortgage insurance (PMI) is a monthly premium that conventional mortgage borrowers must pay when their down payment is less than 20% of the home's purchase price, serving as protection for the lender against default risk.
While PMI enables homeownership with smaller down payments—making it a valuable tool for first-time buyers who haven't accumulated substantial savings—it represents a significant ongoing expense that provides no direct benefit to the borrower.
PMI costs typically range from 0.5% to 1.5% of the original loan amount annually, or approximately $100-250 monthly on a $300,000 mortgage, varying based on credit score, loan-to-value ratio, and loan type.
For borrowers with excellent credit and 15% down (85% LTV), PMI might cost 0.5% annually, while those with lower credit scores and only 5% down could pay 1.5% or more.
Understanding PMI removal rights is crucial to minimizing this expense: under the Homeowners Protection Act (HPA), lenders must automatically terminate PMI when your loan reaches 78% of the original property value through scheduled payments, and must allow you to request cancellation once you reach 80% LTV through a combination of payments and verified property appreciation.
Many homeowners miss opportunities to remove PMI early by not tracking their loan-to-value ratio or requesting cancellation when eligible—actively monitoring your equity position and initiating the removal process can save thousands.
Some strategies accelerate PMI removal: making additional principal payments to reach 80% LTV faster, obtaining a new appraisal if property values have increased (most lenders allow this after two years, though you'll pay $400-600 for the appraisal), or completing substantial home improvements that increase value.
Alternatively, some borrowers choose "lender-paid PMI" (LPMI) where the lender pays the insurance premium in exchange for a higher interest rate—this can be tax-advantageous since the mortgage interest is potentially deductible while PMI is only deductible for some borrowers under certain income limits.
The decision between traditional PMI and LPMI depends on your expected homeownership duration: traditional PMI is usually better if you'll own the home long enough to reach 20% equity and remove PMI, while LPMI may be preferable for those planning to sell within 5-7 years, as the rate increase is typically smaller than PMI costs during that period.
For purchase planning, understanding PMI costs helps with accurate affordability calculations—many first-time buyers underestimate total monthly payments by overlooking PMI, property taxes, and homeowners insurance.