Private Mortgage Insurance (PMI) is one of the most misunderstood — and frustrating — parts of the mortgage process. It can add $100–$400 or more to your monthly payment, and unlike homeowner's insurance, it doesn't protect you at all. It protects your lender. Here's how it works and how to get rid of it.
What Is PMI?
PMI is insurance that lenders require when you put less than 20% down on a conventional mortgage. If you default on the loan, PMI reimburses the lender for their losses. You pay for it, but the benefit goes entirely to the bank.
PMI typically costs 0.5% to 1.5% of your loan amount per year. On a $300,000 loan, that's $1,500–$4,500/year, or $125–$375 per month added to your payment.
5 Ways to Avoid PMI
1. Put 20% Down
The simplest solution. With a 20% down payment on a conventional loan, no PMI is required. The challenge is that 20% on a $400,000 home is $80,000 — a significant barrier for many buyers.
2. Get a VA Loan (Veterans Only)
VA loans are the gold standard for eligible veterans, active duty service members, and surviving spouses. No down payment required, no PMI, ever. If you qualify, this is almost always the best option.
3. Lender-Paid PMI (LPMI)
Some lenders offer to cover PMI in exchange for a slightly higher interest rate. This eliminates the separate monthly PMI charge, but you pay for it through the rate for the life of the loan. It makes sense if you plan to sell or refinance within a few years.
4. Piggyback Loan (80-10-10)
Take a first mortgage for 80% of the price, a second mortgage (home equity loan) for 10%, and put 10% down. Since the first mortgage is only 80% of value, no PMI applies. The second loan carries a higher rate, so run the math to see if this beats PMI.
5. Look for PMI-Free Loan Programs
Some credit unions, banks, and state programs offer conventional-style loans with less than 20% down and no PMI requirement — often for first-time buyers or those below certain income thresholds. Ask lenders explicitly: "Do you have any no-PMI loan programs?"
How to Get PMI Removed
If you already have PMI, you can remove it once you reach 20% equity:
- Automatic cancellation: By federal law (Homeowners Protection Act), lenders must cancel PMI when your loan balance reaches 78% of the original purchase price — as long as you're current on payments.
- Request cancellation at 80%: You can request PMI removal once your balance is 80% of the original value. You may need a clean payment history and possibly an appraisal.
- Appraisal-based removal: If your home has appreciated significantly, a new appraisal may show you already have 20%+ equity. You can then request PMI removal based on current value rather than original purchase price.
- Refinance out of PMI: If rates have dropped or your home has appreciated, refinancing to a new loan with 20%+ equity eliminates PMI while potentially improving your rate.