Our experts answer readers' home-buying questions and write unbiased product reviews (here's how we assess mortgages). In some cases, we receive a commission from our partners; however, our opinions are our own.
David Papazian/Getty Images
- Private mortgage insurance is a type of insurance that protects the mortgage lender in case of borrower default.
- PMI is required on conventional mortgages when the borrower is putting down less than 20%.
- PMI rates vary depending on your credit score, and it can be relatively expensive for those with lower scores.
Low-down-payment mortgages have made buying a home more achievable for cash-strapped borrowers. Today, many borrowers are able to get into a home with as little as 3% down.
But these low down payments come with a cost: PMI. What is private mortgage insurance? Here's everything homebuyers need to know.
PMI: How mortgage insurance works
Private mortgage insurance (PMI) is a type of mortgage insurance added to a conventional mortgage when the borrower makes a low down payment. If you get a conventional mortgage and put down less than 20%, you'll be required to pay for PMI until you reach at least 20% equity in your home.
PMI is also required if you're refinancing and have less than 20% equity in your home.
Conventional mortgages, which are the most common type of mortgage and what most people think of as "traditional" mortgages, don't come with any government backing. This means if the borrower defaults on their loan, the mortgage lender doesn't receive funds from a government agency to recoup its losses.
Borrowers who make large down payments typically are at less of a risk of defaulting on their mortgages, since they have a larger financial stake in the home. And if they do default, the lender has less to lose than with a borrower who has very little equity in their home.
To protect themselves on loans where the borrower has made a small down payment, mortgage lenders require borrowers to pay for private mortgage insurance, which will pay out to the lender if the borrower defaults on their mortgage.
"The greatest benefit to PMI is the homeownership attainability it creates," says Raul Hernandez, a mortgage broker with Competitive Home Lending. "Prior to PMI, potential homebuyers would need to save for a 20% down payment in order to qualify for a home loan."
Mortgage insurance vs. homeowners insurance
When you get a mortgage, you're always required to purchase a homeowners insurance policy. This insurance policy financially protects you in the event that your home is damaged or destroyed. The reason that mortgage lenders require it is because they also have a financial stake in your home, and homeowners insurance protects them from financial loss.
Mortgage insurance works differently from homeowners insurance because it doesn't protect the homeowner at all; instead, it protects the lender from the actions of the homeowner.
How much is private mortgage insurance? Factors that can affect your costs
PMI rates can vary depending on your creditworthiness and your mortgage.
"As with a mortgage loan, the premium for PMI is based on individual loan applications," Hernandez says. "Factors such as debt-to-income, loan-to-value, credit score, and even the number of applicants on a home loan can determine the annual PMI rate."
Typically, borrowers will pay between 0.2% and 2% of the loan amount for PMI each year. This is a wide range, with riskier borrowers paying premiums on the higher end.
Your credit score is one of the main factors that will influence how much you end up paying for PMI, and those with low scores will typically have the highest rates. This is why getting an FHA mortgage is often a better option for those with poor scores; according to the Urban Institute, a borrower who puts down 3.5% and has a credit score below 720 will pay less each month on an FHA mortgage than a conventional mortgage with PMI.
Another factor that can impact your PMI costs is your down payment. If you make a larger down payment, such as 10% or 15%, you'll likely have a lower PMI rate. Insurers will also likely consider your debt-to-income ratio (DTI), which tells them how much of your monthly income is spent on debt payments, including a mortgage.
Types of PMI
The most common method of paying for PMI is to have it included as part of your monthly mortgage payment. This is called borrower-paid mortgage insurance. But there are a few other ways you can get PMI coverage that may work better for you, depending on your situation.
With single-premium mortgage insurance, the borrower pays a lump-sum insurance premium up front. However, if you have the cash for this, it might make more sense to put that money toward your down payment.
Borrowers can also opt for a combination of these two methods of paying for mortgage insurance, where they pay part of the insurance payment up front, and part of it through monthly payments. This is called split-premium mortgage insurance.
Finally, a borrower can choose lender-paid mortgage insurance and take a higher interest rate in exchange for the lender paying for the insurance up front.
How to get rid of private mortgage insurance
The good news is that even if you make a low down payment, PMI won't stick around forever. Once you reach 20% equity in your home, you can ask your mortgage lender or servicer to remove PMI from your monthly mortgage payment. Otherwise, it will drop off automatically when you reach 22% equity.
PMI vs. other types of mortgage insurance
PMI refers specifically to mortgage insurance on conventional loans. FHA loans have their own type of mortgage insurance, called MIP, which is short for "mortgage insurance premium."
USDA loans and VA loans don't require mortgage insurance, but they both have fees that help pay for their government backing. On a USDA loan, this is called a guarantee fee, while VA loans have a funding fee.
FHA mortgage insurance premium
FHA MIP is paid both up front and as part of your monthly mortgage payment toward an annual premium. All FHA borrowers pay an upfront fee equal to 1.75%. This can be paid at closing or rolled into your loan amount.
How much you'll pay for your annual FHA mortgage insurance premium depends on your loan amount, mortgage term, and the size of your down payment. Thanks to recent changes from the US Department of Housing and Urban Development, borrowers now pay less for annual MIP than they have in the past.
Annual MIP ranges from 0.40% to 0.75% of the loan amount. Prior to the HUD changes, most borrowers paid 0.85% for annual MIP; now, they pay 0.55% for a loan less than or equal to $726,200 with a 3.5% down payment.
The downside of FHA mortgage insurance is that most borrowers are required to pay it for the life of the loan. With conventional PMI, you can have it removed when you reach 20% equity.
VA funding fee
The VA loan program's version of "mortgage insurance" is its one-time funding fee that helps pay for the program. VA borrowers are required to pay this fee unless they meet certain criteria, which includes receiving compensation for a service-connected disability.
The VA funding fee, like FHA's upfront MIP, can be paid at closing or financed into the loan. The amount you'll pay depends on the type of loan you're getting, how much you put down, and whether or not you've used the program before. The typical borrower using a VA loan for the first time to purchase a home with 0% down will pay a funding fee equal to 2.15% of the loan amount.
USDA guarantee fee
The USDA loan guarantee fee helps cover the cost of the US Department of Agriculture's guarantee, which promises lenders that it will cover up to 90% of the loan amount if a borrower defaults. This is what enables USDA loan lenders to offer these mortgages with no required down payment.
The upfront guarantee fee is equal to 1% of the loan amount and can be paid up front or rolled into your mortgage. The annual USDA guarantee fee is equal to 0.35% of the loan amount.
PMI frequently asked questions
Should I pay PMI or put 20% down?
Just because you have the funds to put 20% down doesn't always mean you should. If you have a great credit profile, PMI might not be that big of an expense, and it could enable you to put that savings into an investment account where it can earn you money. You also want to be careful about draining your savings for a down payment, since you'll likely need that money for home maintenance and repairs.
Additionally, if you don't have a 20% down payment already saved up, waiting to buy a house until you do means you'll spend that time missing out on growing your wealth through appreciation, since home values typically rise over time.
If you're worried about PMI costs due to poor credit, consider whether an FHA mortgage might be more affordable for you.
How much is PMI on a $500,000 loan?
PMI rates can range between 0.2% and 2% of the loan amount depending on your credit profile and down payment. On a $500,000 loan, this means your PMI premium could cost between $1,000 annually (around $83 per month) and $10,000 annually (around $833 per month).
Do you always have to pay private mortgage insurance?
If you're getting a standard conventional mortgage with a down payment below 20%, you'll generally always need to pay for private mortgage insurance. Some lenders offer conventional mortgage products that allow low down payments without PMI, but be aware that these loans often come with higher interest rates.
How long do you pay PMI?
You'll pay PMI until you have 20% equity in your home. Once this happens, you can request to have your PMI removed, or wait for it to drop off automatically at 22% equity.