Understanding PMI and How to Avoid It on Your Mortgage
What Is PMI and Why Does It Exist?
Private mortgage insurance (PMI) is an insurance policy that protects the lender if a borrower defaults on a conventional home loan. PMI is typically required when your down payment is less than 20% of the home’s purchase price or when your loan-to-value ratio (LTV) exceeds 80%. Because buyers who put down less money are statistically more likely to default, lenders use PMI to shift part of that risk to an insurance company. Unfortunately, the cost of that policy is passed along to you—the homeowner—adding anywhere from 0.3% to 1.5% of the original loan amount to your annual housing expenses.
How Much Does PMI Cost?
The exact premium you will pay depends on your credit score, down payment size, debt-to-income ratio, loan type, and even the insurer your lender uses. According to Freddie Mac, most borrowers pay between $30 and $70 per month for every $100,000 borrowed. On a $350,000 mortgage, PMI can easily add $100 to $250 to your monthly payment. Over the first five years of the loan, that could total more than $10,000—money that does nothing to build equity or reduce your principal balance.
Types of PMI Premiums
Not all PMI is structured the same way. Understanding the various formats can help you evaluate your options:
Borrower-Paid Monthly PMI
This is the most common form. The premium is bundled into your mortgage payment and disappears automatically once you reach 78% LTV, provided you are current on payments.
Borrower-Paid Single PMI
You pay the entire insurance premium up front at closing. While this eliminates the monthly fee, it requires thousands of dollars in cash and offers no refund if you sell or refinance early.
Lender-Paid PMI
The lender covers the cost but charges you a slightly higher interest rate for the life of the loan. Because the rate hike never drops off, lender-paid PMI can end up being more expensive than monthly PMI if you keep the mortgage long term.
Split-Premium PMI
This hybrid approach lets you pay a portion of the premium at closing and finance the rest as a smaller monthly fee, offering flexibility when cash flow or upfront cash is limited.
Strategies to Avoid PMI From Day One
Skipping PMI altogether is the most effective way to keep your mortgage costs down. Below are proven strategies for avoiding PMI before you sign on the dotted line:
Make a 20% Down Payment
The simplest route is also the hardest for many buyers: putting down at least 20% removes the lender’s PMI requirement by immediately lowering your LTV to 80% or less. Saving for a larger down payment could delay your purchase, but it can slash thousands from future housing costs.
Use a Piggyback Loan
A piggyback loan is a second mortgage—often an 80/10/10 structure—where you borrow 80% with a first mortgage, finance 10% with a home-equity line of credit, and place 10% in cash. Because the first mortgage sits at the critical 80% LTV threshold, PMI is not required. Compare the interest rate and fees on the HELOC with PMI premiums to see which is cheaper.
Choose Government-Backed Loans Without PMI
Loans guaranteed by the VA do not charge PMI, and USDA loans charge an upfront and annual guarantee fee that is usually cheaper than conventional PMI. If you qualify for these programs, they can be lower-cost alternatives.
Negotiate With the Lender
Some lenders offer portfolio loans or special programs for first-time buyers that waive PMI, especially for borrowers with excellent credit and stable income. Shop around and ask directly about PMI-free options.
How to Get Rid of PMI After Closing
If you already have PMI, you are not necessarily stuck with it until the 78% threshold kicks in. Try these tactics to drop PMI early and accelerate savings:
Track Your Loan Balance
Once your principal balance hits 80% of the home’s original value, you have the right under the Homeowners Protection Act to request PMI cancellation in writing. Make sure your payment history is spotless and confirm with your loan servicer.
Prove Increased Home Value
In a strong market, appreciation can push your LTV below 80% faster than scheduled. Pay for a professional appraisal and present it to your servicer; many will cancel PMI based on current value if you fall below 75% LTV.
Make Extra Principal Payments
Even modest additional payments each month can shave years off your amortization schedule and drive down the LTV more quickly, allowing you to request PMI cancellation sooner.
Refinance Into a New Loan
If interest rates have fallen or your credit has improved, refinancing into a conventional loan without PMI can be a double win. Be sure to weigh closing costs against projected savings to see if the math works in your favor.
Is It Ever Worth Paying PMI?
There are times when paying PMI can be a smart financial move. If home prices are rising rapidly, getting into a house sooner—even with PMI—can build equity that outweighs the cost of the insurance. Additionally, first-time buyers who would deplete emergency savings to hit 20% down are often better served putting less money down, maintaining cash reserves, and paying PMI temporarily. The key is to enter the equation with a clear exit strategy for removing PMI as early as possible.
Key Takeaways
Private mortgage insurance is an added expense meant to protect lenders, not borrowers. Understanding the rules governing PMI empowers you to eliminate or avoid it entirely. Save for a 20% down payment when possible, explore piggyback loans or government programs, and stay vigilant about your loan-to-value ratio after closing. Whether you are buying your first home or refinancing an existing mortgage, minimizing or eradicating PMI can free up cash for home improvements, retirement savings, or simply a lower monthly payment.
The bottom line: PMI does not have to be a permanent part of your financial life. With careful planning and strategic actions, you can bypass or shed this cost and accelerate your journey toward full homeownership.