Private Mortgage Insurance Protects Lenders When Buyers Make Low Down Payments

Traditionally, home buyers were required to make a 20% down payment to qualify for a mortgage. However, the majority of buyers don't put 20% down today. As home prices have climbed, saving enough to put 20% down has become an impossibility for many first-time buyers.

While smaller down payments are the new norm, they're riskier for lenders because buyers have less equity in a home. Statistically, there's a greater chance of the loan defaulting when buyers have less invested in the transaction.

To limit this risk, lenders follow mortgage guidelines which require buyers with down payments below 20% to purchase private mortgage insurance (PMI). This guide explains what PMI is, how much it costs, and how it can help put ownership within reach, even if you don't have a large down payment ready.

PMI Definition

Private mortgage insurance is insurance that lenders require buyers to purchase when buyers put less than 20% down on a conventional mortgage. There's also a similar mortgage insurance requirement (called MIP) for FHA loans.

If you are buying a home and making a small down payment, your purchase of PMI protects the lender from loss if the lender must foreclose and the house doesn't sell for the full balance due.

PMI vs. MIP

PMI and FHA loan mortgage insurance premiums (MIP) both protect lenders, but the key difference is that you'll need private mortgage insurance if you have a conventional loan not backed by the government, while MIP is required for FHA loans.

You will typically pay monthly premiums for PMI as part of your mortgage payment after closing. MIP, on the other hand, comes with an upfront (due at closing) and monthly premium. MIP is also required on all FHA loans, while PMI is only necessary when you have a down payment below 20%.

Lastly, PMI is removed from your loan, either automatically once your loan balance reaches a 78% loan-to-value ratio or upon your request when your loan-to-value ratio reaches 80%. By contrast, MIP cannot be removed from an FHA loan for the life of the loan if your down payment at the time of purchase was 10% or below. If you put at least 10% down with an FHA loan, MIP is cancelled after 11 years.

PMI Cost: How Much Is Private Mortgage Insurance?

When you're required to buy private mortgage insurance, you pay for it as part of your monthly payments. Costs vary by lender but usually range between .5% and 1% of the loan amount.

For example, if you borrowed $400,000 and PMI costs 1% annually, you'd have a $4,000 annual payment or a monthly PMI payment of $333.33. This is on top of your principal, interest, property taxes, and homeowners insurance that you're paying monthly for your mortgage.

Factors That Impact the Cost of PMI

Multiple different factors impact how much PMI costs, including the following:

• Loan amount: PMI costs more with larger loan amounts since monthly costs are based on a percentage of the loan.
• Down payment amount: A lower down payment means you have less equity and the lender takes on more risk, so your PMI costs will typically be higher.
• Credit score: Borrowers with higher credit scores typically have a lower risk of default, so they benefit from lower PMI costs.
• Loan-to-value ratio (LTV): Your loan-to-value ratio is the amount you're borrowing relative to the value of your home. The higher the LTV ratio, the higher the risk for lenders, and PMI premiums reflect that risk.
• Fixed-rate or adjustable-rate loan: PMI costs may be higher for adjustable-rate loans compared with fixed-rate loans because there's traditionally a slightly greater risk of default with adjustable-rate mortgages.

How PMI is Paid

PMI premiums are included in your mortgage payment. When you pay your home loan each month, your payment covers the principal and interest, PMI premiums, taxes, and insurance.

PMI Requirements by Loan Type

While only conventional mortgages require private mortgage insurance, most other mortgage loan types have similar costs to protect lenders. Here are the requirements for different kinds of loans.

Types of PMI

There are also different types of PMI for conventional mortgage loans. Here are the most common options.

• Borrower-paid PMI: Borrower-paid PMI is the most common. You pay monthly premiums for PMI as part of your mortgage payment.
• Lender-paid PMI: Sometimes lenders pay the cost of PMI upfront, but this cost is usually passed onto you in the form of a slightly higher interest rate over the life of the loan.
• Single-premium: You can avoid monthly PMI premiums by paying the entire cost of the private mortgage insurance policy up front.
• Split-premium PMI: With split-premium PMI, you pay an upfront payment at closing, which lowers your ongoing monthly premium payments.

How To Avoid PMI

There are several ways to avoid paying PMI when buying a house. Here are some options.

• Make a 20% down payment: If you make a 20% down payment, this reduces a lender's risk. PMI is no longer necessary to protect the lender in case of foreclosure, so you won't be required to buy this insurance.
• Consider a VA loan: VA loans do not require PMI, even with no down payment. However, you must pay an upfront VA funding fee, and VA loans are only available for qualifying members of the military service community.
• Look into a piggyback loan: A piggyback loan allows you to borrow 80% of the value of your home using one loan, and to borrow the remaining funds you need using a second loan. Since you are not borrowing more than 80% of your home's value on your primary mortgage, you won't be required to pay PMI.

How To Get Rid of PMI

Removing PMI from your mortgage is possible once you have enough equity in your home. Once your loan-to-value ratio equals 80% or less, you can request that your lender remove PMI. When your balance drops to a 78% loan-to-value ratio, your lender must automatically remove PMI.

Private Mortgage Insurance FAQs

If you still need to know more, here are the answers to some frequently asked questions about PMI.

How Long Do You Have To Pay PMI?

You will need to pay PMI until your home's loan-to-value ratio reaches 80%. This means your loan value is equal to or below 80% of the amount your home is worth. You can request removal of PMI at this point. If you don't request removal, your lender must automatically remove PMI when your loan-to-value ratio hits 78%.

Is PMI Tax-Deductible?

Because of recent changes made by the One Big Beautiful Bill Act, PMI is tax-deductible in 2026. A PMI deduction is one of the available tax deductions for homeowners because PMI premiums are treated as a type of mortgage interest. However, you must itemize to claim this deduction.

Can You Pay Off Your PMI Early?

Paying extra towards your mortgage will help you build equity more quickly so you can eliminate PMI sooner. Again, you can request PMI removal when your loan-to-value ratio reaches 80%. If you don't request removal, your lender will remove PMI when your loan-to-value ratio hits 78%.

Final Thoughts: Understanding PMI

While PMI raises your monthly mortgage costs, it also makes it possible to buy a home sooner than you might be able to if you had to save up a 20% down payment. If you are interested in exploring your home-buying options, reach out to get prequalified with Freedom Mortgage today.