Private Mortgage Insurance, commonly known as PMI, is a type of insurance that protects mortgage lenders against the risk of default by the borrower. It is typically required on conventional loans when a homebuyer makes a down payment of less than 20% of the home’s purchase price. While PMI does not protect the borrower, it allows many people to purchase a home sooner than they could if they had to wait until saving a full 20% down payment.
Why PMI Exists
Lenders assume more risk when borrowers put less money down. PMI reduces that risk by providing the lender with financial protection if the borrower fails to repay the loan. If the borrower defaults, PMI helps the lender recover some of their losses.
How PMI Works
PMI is usually arranged by the lender and provided by private insurance companies. It can be paid for in different ways:
1. Borrower-paid mortgage insurance (BPMI)
This is the most common type of PMI and requires the borrower to pay a mortgage insurance premium for the duration of the PMI requirement. These premiums are usually rolled into the monthly mortgage payment but can also be paid separately in most cases.
2. Single-premium mortgage insurance (SPMI)
With single-premium mortgage insurance, you will pay for your coverage in one lump sum. The policy will continue to protect your lender until your requirement drops off, but you will not be responsible for paying premiums each month.
This type of PMI involves a higher upfront cost but results in a lower monthly mortgage payment. However, if you are able to get PMI removed earlier than expected (either due to a market shift or by refinancing your home) those prepaid premiums will be lost.
3. Split-premium mortgage insurance
As the name implies, split-premium mortgage insurance allows you to split up your PMI costs. You will pay a portion of your premiums upfront, at closing. The other portion will be spread out into monthly premiums and usually rolled into your mortgage payment. This results in a higher upfront cost, but lower ongoing monthly costs.
4. Lender-paid mortgage insurance (LMPI)
With lender-paid mortgage insurance, your mortgage lender will foot the bill for the policy. This can reduce your monthly payments and your upfront mortgage costs, but it comes at a price: most lenders will charge a higher mortgage interest rate in exchange. This can increase your total cost over the life of the loan, especially if you plan to remain in the home for a long time.
The cost of PMI ranges from 0.3% to 1.75% of the original loan amount per year, depending on:
For example, on a $300,000 loan, PMI could cost between $900 and $4,500 annually.
When Can You Stop Paying PMI?
You do not have to pay PMI forever. Here is when it can be removed:
Some lenders may require an appraisal to verify that the home’s value supports PMI removal.
Alternatives to PMI
Final Thoughts
Private Mortgage Insurance helps more people become homeowners by lowering the initial down payment requirement. While it does increase your monthly costs, PMI can be a worthwhile trade-off if it gets you into a home sooner. Still, understanding when and how it can be removed—and what it will cost—is essential to making an informed mortgage decision.
If you are shopping for a mortgage and considering a small down payment, talk to your lender about PMI options, costs, and cancellation policies to find the best fit for your situation.