Understanding Private Mortgage Insurance (PMI) is crucial for homebuyers, especially when considering the financial implications of purchasing a home with a down payment of less than 20%. PMI is a type of insurance that protects lenders against the risk of default and foreclosure. Typically, lenders require PMI for conventional loans when the down payment is less than 20% of the home’s purchase price. While PMI doesn’t provide direct benefits to the borrower, it enables individuals to qualify for a mortgage sooner, without waiting to save a 20% down payment.
The cost of PMI varies based on several factors, including the loan amount, credit score, and loan-to-value (LTV) ratio. On average, PMI costs range from 0.46% to 1.50% of the original loan amount per year. For instance, on a $300,000 mortgage, this translates to annual premiums between $1,380 and $4,500, or approximately $115 to $375 monthly. Credit scores significantly influence PMI rates; borrowers with higher credit scores generally pay lower PMI premiums.
PMI can be structured in various ways, depending on the lender and loan program. The most common type is Borrower-Paid PMI (BPMI), where premiums are added to monthly mortgage payments. Single-Premium PMI involves a one-time upfront payment made at closing, eliminating monthly premiums. Lender-Paid PMI (LPMI) is another option, where the lender covers the PMI cost, but the borrower pays a higher interest rate. Split-Premium PMI combines upfront and monthly payments, offering flexibility in managing costs.
Avoiding PMI can lead to significant savings. The most straightforward method is to make a 20% down payment. Alternatively, a piggyback loan, also known as an 80-10-10 loan, involves taking out a second mortgage to cover 10% of the home’s price, combined with a 10% down payment, effectively reaching the 20% threshold. Opting for Lender-Paid PMI (LPMI) is another strategy, where the lender covers the PMI cost in exchange for a higher interest rate. For eligible veterans, VA loans require no PMI and often no down payment. Additionally, some affordable loan programs offer low down payment options without PMI requirements.
If you’re already paying PMI, there are ways to eliminate it. Under the Homeowners Protection Act, lenders must automatically cancel PMI when your mortgage balance reaches 78% of the home’s original value, provided payments are current. You can also request PMI cancellation once your LTV ratio reaches 80%, which may require a new appraisal to confirm the home’s value. Refinancing your mortgage can help you reach the 80% LTV threshold, eliminating PMI. Making extra payments toward the principal can accelerate reaching the 80% LTV mark.
As of 2025, PMI premiums are not tax-deductible. The federal tax deduction for PMI expired at the end of 2021 and has not been reinstated. However, a bill introduced in February 2025 aims to bring back this deduction. Until it’s passed into law, PMI remains non-deductible.
While PMI adds to your monthly expenses, it can be a valuable tool for achieving homeownership sooner, especially if saving a 20% down payment isn’t feasible. Understanding PMI’s costs and how to manage or eliminate it can help you make informed decisions aligned with your financial goals.