How PMI works — and when you can drop it

If you buy a home with less than 20% down, your lender will require private mortgage insurance — PMI. It's one of the most misunderstood costs in homeownership, partly because it's often buried in your monthly payment without much explanation. Here's what it actually is, how much it costs, and how to get rid of it.

What PMI is — and isn't

PMI protects the lender, not you. If you default on the loan, PMI pays the lender the difference between what they recover by selling the home and what you owed. You pay for it every month, but it provides you no direct benefit — it's purely a cost of having less than 20% equity.

Despite this, PMI isn't necessarily a reason to avoid buying with less than 20% down. It's a fee for the privilege of entering homeownership earlier, and in markets with strong appreciation it often pays for itself in equity gains within a few years.

How much PMI costs

PMI typically costs 0.5–1.5% of the loan amount annually, depending on your loan size, down payment percentage, and credit score. On a $400,000 home with 10% down ($360,000 loan), you're looking at $150–$450 per month added to your payment.

Down payment	Loan amount	Est. PMI rate	Monthly PMI
5% ($20,000)	$380,000	1.0%	$317/mo
10% ($40,000)	$360,000	0.7%	$210/mo
15% ($60,000)	$340,000	0.4%	$113/mo
20% ($80,000)	$320,000	None	$0

How to get rid of PMI

There are four ways to eliminate PMI:

• Automatic cancellation: Under federal law (Homeowners Protection Act), lenders must automatically cancel PMI when your loan balance reaches 78% of the original purchase price — meaning you've reached 22% equity based on your original price, on schedule.
• Request cancellation at 80% LTV: You can request PMI removal when you've paid your balance down to 80% of the original value, without waiting for automatic cancellation. You must be current on payments and may need to demonstrate no liens.
• New appraisal at 80% LTV: If your home has appreciated significantly, you can request a new appraisal. If the appraisal shows your current balance is 80% or less of the new value, you may qualify to drop PMI early — even if you haven't made enough payments.
• Refinancing: If you refinance when you have 20%+ equity based on current value, the new loan won't require PMI.

PMI alternatives: are they worth it?

Some buyers try to avoid PMI using alternative structures:

• Piggyback loan (80/10/10): A first mortgage for 80%, a second mortgage for 10%, and a 10% down payment. Avoids PMI but often at a higher interest rate on the second mortgage — run the math to see if it's cheaper.
• Lender-paid PMI (LPMI): The lender pays the PMI premium in exchange for a higher interest rate. Makes sense only if you plan to sell or refinance before you'd have reached 20% equity anyway — because the higher rate never goes away, while PMI does.

Should you put 20% down to avoid PMI?

Not necessarily. Waiting to save a full 20% down payment in an appreciating market means paying more for the home (and forgoing equity gains) while continuing to rent. In many scenarios, buying with 10% down, paying PMI for 3–5 years, then dropping it is financially superior to waiting years more to save 20%.

The right answer depends on your market, savings rate, and how long it would realistically take to reach 20%. Use the affordability calculator to run both scenarios with your real numbers.

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