Private mortgage insurance protects the lender, not you, and costs between 0.5% and 1.5% of your loan amount each year

Private mortgage insurance (PMI) is a monthly fee added to your mortgage payment when you put down less than 20% of the home's purchase price. The insurance reimburses your lender if you stop paying the loan — it has nothing to do with protecting your own investment. On a $300,000 mortgage with 10% down, PMI typically runs $150 to $300 per month, though the exact amount depends on your credit score, the loan type, and your lender's pricing.

PMI is not optional if you borrow more than 80% of the home's value. You cannot negotiate it away or shop for a better rate the way you can with homeowners insurance. Your lender chooses the PMI company and sets the premium. The only real choices are whether to pay it now or find a way to avoid it before closing.

Key Takeaways

  • PMI costs 0.5% to 1.5% of your loan amount annually and is required whenever you put down less than 20% of the purchase price.
  • A larger down payment — even 15% instead of 10% — meaningfully reduces both the PMI amount and the total interest you pay over the life of the loan.
  • Piggyback loans (a second mortgage covering part of your down payment) can eliminate PMI but come with a higher interest rate on the second loan and more complex closing costs.
  • Once your home equity reaches 20% through a combination of payments and appreciation, you can request PMI removal, though the timeline varies by loan type.
  • Buying in a lower-priced market or waiting to save more for a down payment are the most straightforward ways to avoid PMI entirely.

How PMI is calculated and what it actually costs you

PMI premiums are expressed as a percentage of your loan amount and vary based on three main factors: how much you're borrowing relative to the home's value (called the loan-to-value ratio or LTV), your credit score, and the type of mortgage. A borrower with a 680 credit score putting 10% down will pay more than someone with a 740 score putting 15% down, even if the home price is identical.

The cost compounds over time. On a $300,000 home with 10% down ($30,000), you're borrowing $270,000. At a PMI rate of 0.75% annually, that's $2,025 per year or about $169 per month. Over 10 years, before you've paid down enough equity to remove it, you've paid roughly $20,000 in PMI alone — money that builds no equity and disappears when the insurance ends. That same $20,000 applied to your down payment would have eliminated PMI entirely and reduced your total loan amount.

Increasing your down payment to reach 20%

The simplest way to avoid PMI is to save until you can put down 20% or more. On a $300,000 home, that means $60,000 instead of $30,000. The difference in monthly payment is substantial: a $270,000 loan at 7% interest costs roughly $1,797 per month (principal and interest only), while a $240,000 loan costs about $1,597 — a $200 monthly savings before PMI is even factored in. Add the $169 PMI payment to the first scenario, and you're paying $1,966 versus $1,597.

If a full 20% is out of reach, even moving from 10% to 15% down makes a real difference. At 15% down on a $300,000 home, you borrow $255,000 instead of $270,000, and PMI premiums drop because your LTV is lower. The monthly PMI payment might fall from $169 to $120, and you've also reduced the principal you're financing by $15,000.

The trade-off is time. Saving an extra $30,000 takes years for many buyers. If you're renting and paying $1,500 per month, waiting two more years to save that down payment means two more years of rent with no equity building. The math depends on your local market: in a fast-appreciating area, buying now with PMI and removing it in five years might cost less overall than waiting and paying higher prices later.

Using a piggyback loan to avoid PMI

A piggyback loan (or 80/10/10 loan) is a second mortgage that covers part of your down payment, allowing you to borrow 80% with a first mortgage and 10% with a second, putting only 10% down yourself. This structure eliminates PMI because your first mortgage is exactly 80% LTV — the threshold where PMI is no longer required.

The catch is that the second mortgage carries a higher interest rate than the first. If your primary mortgage is 7%, the piggyback loan might be 8.5% or higher. On a $300,000 home with a 10% piggyback ($30,000), you're paying roughly 1.5% more interest on that $30,000 for the life of the loan — potentially $450 to $600 per year in extra interest. Over 10 years, that's $4,500 to $6,000 in additional cost compared to PMI, though the piggyback loan may have a shorter term (often 10 or 15 years) while PMI lasts until you reach 20% equity.

Piggyback loans also complicate closing. You're managing two separate loans with two sets of closing costs, two monthly payments (though many servicers combine them), and two lenders to contact if problems arise. Some lenders have stopped offering piggyback loans, so availability varies. This strategy makes sense if you have the cash for 10% down, want to avoid PMI, and can absorb the higher rate on the second loan — but it's not simpler or cheaper than saving for a larger down payment.

Removing PMI once you build equity

PMI is not permanent. Once your home equity reaches 20% of the current market value, you can request removal. Equity builds two ways: through your monthly payments (which reduce the loan balance) and through home appreciation (which increases the home's value). A home that appreciates 5% per year reaches 20% equity faster than one in a flat market, even with the same payment schedule.

The process differs by loan type. On a conventional loan, you can request PMI removal once you reach 20% equity, and the lender must remove it automatically at 22% equity (by law). On an FHA loan, PMI (called mortgage insurance premium or MIP) is more complicated: if you put down less than 10%, you pay MIP for the life of the loan; if you put down 10% or more, MIP drops after 11 years. VA loans and USDA loans don't require PMI at all, regardless of down payment.

To request removal, contact your loan servicer with proof of the current home value — usually an appraisal, though some lenders accept a broker price opinion or recent comparable sales. The appraisal costs $300 to $500 out of pocket. If your home hasn't appreciated and you've only paid down the loan, reaching 20% equity takes years. On a $270,000 loan at 7% interest, it takes roughly 8 to 10 years of payments to reach that threshold, assuming no additional principal payments.

Refinancing to remove PMI

If your home has appreciated significantly or you've paid down the loan faster than expected, refinancing can eliminate PMI without waiting. If you bought a $300,000 home with 10% down and it's now worth $330,000, your equity has grown from $30,000 (10%) to potentially $60,000 or more (18%+) depending on how much you've paid down. A new appraisal proving the higher value can trigger a refinance into a loan with no PMI.

Refinancing has its own costs: a new appraisal ($300–$500), loan origination fees (typically 0.5% to 1% of the new loan amount), and possibly title insurance and other closing costs. On a $250,000 refinanced loan, closing costs might total $2,500 to $4,000. If you're paying $200 per month in PMI, it takes 12 to 20 months for the savings to cover those costs. Refinancing makes sense if you plan to stay in the home long enough to recoup the closing costs and if current interest rates haven't risen significantly since your original loan.

Choosing a lower-priced home or waiting to save more

The most straightforward path is often the one that requires the most patience: buy a home you can afford with 20% down, or wait until you've saved enough. This approach costs nothing extra, creates no complications, and builds equity from day one without PMI dragging on your monthly payment.

In practice, this means either targeting a lower price point than you initially considered or delaying your purchase. If you've saved $40,000 and want to buy a $300,000 home, you're 13% short of 20% down. You could instead buy a $200,000 home with $40,000 down (20%) and no PMI, or wait two more years to save the additional $20,000. The first option gets you into homeownership sooner and eliminates PMI immediately. The second delays ownership but avoids the compromise of a smaller home.

Market conditions matter. In a rapidly appreciating market, buying sooner with PMI and removing it in five years might cost less overall than waiting and paying higher prices. In a flat or declining market, waiting to save more makes more financial sense.

Frequently Asked Questions

Can I remove PMI before reaching 20% equity?

On a conventional loan, no — you must reach 20% equity by law. On an FHA loan, you cannot remove mortgage insurance if you put down less than 10%, and it lasts the life of the loan. If you put down 10% or more on an FHA loan, MIP drops after 11 years. Refinancing into a new loan is the only way to remove PMI early if you haven't reached 20% equity.

Does PMI ever go away automatically?

On a conventional loan, yes — your lender must remove PMI automatically once you reach 22% equity. On an FHA loan, it depends on your down payment. If you put down 10% or more, MIP ends after 11 years of payments. If you put down less than 10%, you pay MIP for the life of the loan.

Is PMI tax-deductible?

PMI was tax-deductible for some borrowers in past years, but that deduction expired. Currently, PMI is not deductible on your federal tax return. Mortgage interest is deductible (if you itemize), but PMI is not.

What's the difference between PMI and mortgage insurance on an FHA loan?

PMI is specific to conventional loans. FHA loans use mortgage insurance premium (MIP), which works differently: it's required regardless of down payment and lasts longer. MIP is also typically more expensive than PMI, making FHA loans costlier over time unless you're putting down very little and planning to refinance quickly.

Should I take out a piggyback loan to avoid PMI?

Only if you have 10% down saved, want to avoid PMI, and can afford the higher interest rate on the second mortgage. Calculate the total cost of the piggyback loan's higher rate over its term and compare it to the cost of PMI over the same period. In most cases, saving for a larger down payment or accepting PMI temporarily is cheaper.