What Is Private Mortgage Insurance (PMI) and How Do You Avoid It?
PMI adds hundreds to your monthly payment and insures your lender, not you. Here is everything you need to know about how to avoid it or get rid of it.
Why PMI exists
When you borrow more than 80% of a home's value, lenders consider the loan higher risk. If you default early in the mortgage — when you have little equity — the lender may not recover the full outstanding balance by selling the property. Private Mortgage Insurance is how lenders protect themselves against that shortfall.
Here is the part that surprises most first-time buyers: you pay for insurance that covers your lender, not you. Understanding this clearly helps you decide how hard to work to avoid it.
How much does PMI cost?
PMI is typically quoted as an annual percentage of the original loan amount, charged monthly. The range is wide — from about 0.2% to 2% per year — depending on your loan-to-value (LTV) ratio, credit score, loan term, and lender.
Worked example
| Detail | Value |
|---|---|
| Home purchase price | 250,000 |
| Down payment (10%) | 25,000 |
| Loan amount | 225,000 |
| PMI rate (est. 0.7% per year) | 1,575/year |
| Monthly PMI cost | ~131 |
On a loan-to-value of 90%, a mid-range PMI rate of 0.7% adds 131 to your monthly payment. Over the years it takes to reach 80% LTV, that accumulates to several thousand in premiums — all of which benefit the lender, not you.
Use the mortgage calculator to see your full payment including estimated PMI, or the down payment calculator to model how much you need to save to avoid it.
When PMI automatically cancels
In many countries, laws or standard mortgage terms require the lender to cancel PMI once your loan balance reaches a set threshold — commonly 78–80% of the original purchase price (not the current market value).
Two key thresholds:
- 80% LTV: You can request cancellation. The lender will typically order an appraisal to confirm your balance and value qualify.
- 78% LTV: In jurisdictions with consumer-protection rules (such as the US Homeowners Protection Act), the lender must automatically cancel PMI at this point based on the original amortisation schedule — provided your payments are current.
Early in a standard 30-year mortgage, you will not hit 80% LTV quickly through amortisation alone. Making extra principal payments, or benefiting from rising property values, can get you there faster.
Ways to avoid PMI entirely
1 — Put down 20% or more
The cleanest solution. Reach a 20% down payment and PMI never enters the picture. If you need guidance on how your down payment affects your total cost, see how your down payment affects your mortgage.
2 — Piggyback loan (80-10-10 structure)
You take a first mortgage for 80% of the purchase price, a second loan (home equity loan or HELOC) for 10%, and put 10% down yourself. The first mortgage stays at exactly 80% LTV — no PMI triggered.
| Component | % of price |
|---|---|
| First mortgage | 80% |
| Second loan (piggyback) | 10% |
| Your down payment | 10% |
The trade-off: the second loan carries a higher rate than the first, and you are managing two loan payments. Run the numbers to see whether the combined interest cost exceeds what PMI would have charged.
3 — Lender-paid PMI (LPMI)
As described in the FAQ above, the lender absorbs the PMI premium in exchange for a permanently higher rate. This can be sensible if you expect to sell or refinance before you would have cancelled PMI anyway.
4 — VA or other government-backed loans
In some countries, certain government-backed mortgage programs (veterans' programs, rural housing loans, etc.) do not require PMI regardless of down payment. Eligibility rules vary — check what programs are available in your region.
Impact on monthly payment and affordability
PMI is not just a line item — it directly affects how much house you can afford. A lender calculating your debt-to-income ratio includes PMI in your housing expense. A 131/month PMI premium on a 225,000 loan could reduce how large a mortgage you qualify for.
For a full affordability picture, the home affordability calculator lets you factor in your income, debts, and expected PMI to see your realistic price range.
Key takeaways
- PMI protects the lender against default risk when your down payment is below 20% — you pay the premium but receive no direct benefit.
- On a 250,000 loan with a 10% down payment, PMI can add 100–200 or more to your monthly payment until you reach 80% LTV.
- You can avoid PMI with a 20% down payment, a piggyback loan structure, or lender-paid PMI — each has trade-offs worth modelling before you decide.
Figures are illustrative estimates. Consult a licensed mortgage or financial advisor for advice specific to your situation.
Frequently asked questions
Does PMI protect me if I lose my job and cannot make payments?+
No. PMI protects the lender, not you. If you default, PMI pays the lender for part of its loss. You still face foreclosure and credit damage. Some separate products (mortgage protection insurance) cover the borrower, but they are distinct from PMI.
How do I request PMI cancellation?+
Once you believe your loan-to-value ratio has reached 80%, write to your lender requesting cancellation. They will typically require a formal appraisal (at your cost, usually 300–500) to confirm the current property value. Keep your payment history clean — lenders can deny cancellation if you have late payments.
What is lender-paid PMI and is it a good deal?+
With lender-paid PMI (LPMI), the lender covers the premium in exchange for a slightly higher interest rate — typically 0.25–0.5 percentage points above what you would otherwise receive. Unlike borrower-paid PMI, LPMI does not cancel when you reach 80% LTV — the higher rate sticks for the life of the loan unless you refinance. It can be worthwhile if you plan to sell or refinance within a few years.
Is the PMI rate the same regardless of my credit score?+
No — borrowers with higher credit scores generally pay lower PMI rates. A borrower with a 760+ credit score might pay 0.2% annually, while a borrower with a 640 score on the same loan could pay 1.5% or more. Improving your credit before applying can meaningfully reduce this cost.
Can I deduct PMI on my taxes?+
This depends entirely on your country and its current tax law. In some jurisdictions PMI premiums have historically been deductible as mortgage interest; in others they are not. Tax rules change frequently, so verify the current treatment with a tax professional rather than relying on what applied a few years ago.
Try the calculators
Keep reading
- How Your Down Payment Affects Your Mortgage
A bigger down payment does four things at once — it cuts your loan, lowers your rate risk, can erase mortgage insurance, and shrinks the interest you pay for decades.
- How Much House Can I Afford?
Your income sets a budget, but your debts, down payment, and interest rate decide the actual price tag — here is how they fit together.
- How Loan Amortization Works (With a Worked Example)
See exactly how each loan payment splits between interest and principal — and when you finally start building real equity.
David writes about borrowing without the jargon, after years of helping friends and family decode loan paperwork. He believes everyone deserves to understand what they’re signing.