What Is PMI? Everything You Need to Know About Private Mortgage Insurance

Buying your first home isn’t easy. And for many millennials, homeownership may cost more than they think.

That's because many new homeowners end up paying an extra fee on top of their regular mortgage payments. This fee comes in the form of private mortgage insurance, or PMI, a form of mortgage insurance that can add significant homebuying costs. It’s a type of policy that protects the lender in the event you fail to make your mortgage payments. While the extra payments can help you get into your first home quicker, it’s easy to get caught by surprise.

“Going in most first-time home buyers don’t know about private mortgage insurance,” says Bill Banfield, executive vice president of capital markets for Quicken Loans.

Homebuyers are typically on the hook for private mortgage insurance when they buy a house with less than 20% down. It’s not insurance for you, the homeowner, but for your lender in case you default on your mortgage. The mortgage lender charges PMI based on the total loan amount and adds this cost atop homeowners’ monthly mortgage payments.

For example, the average price of the millennial starter home in 2022 was $325,000, according to data from Realtor.com. If the new buyers’ down payment was 10% (or $32,500) and their 30-year mortgage loan is $292,500, PMI costs would average around $150 per month, changing depending on the buyers’ credit score, the loan-to-value and debt-to-income ratios. That adds up to an extra $1,800 a year.

The nice thing is that PMI doesn’t last the duration of the loan and there are ways to get out of it. Here’s how to reduce or ditch PMI.

Save enough for a 20% down payment

The most obvious way to avert PMI from the beginning is to wait until you have that 20% down payment amount upfront. But this could take years, and the rising value of houses in that market could keep potential buyers frustrated chasing the growing down payment.

A relative can also make a gift for the balance to bring your down payment to 20%. There are some restrictions, but generally, if a buyer has a letter with these details, it will pass muster with the lender’s underwriters.

Get to 22% home equity

When a buyer’s equity has reached 22% of the home’s original appraised value, the loan servicer is required to drop PMI. In many cases, however, homeowners can petition their lenders to drop PMI when they have built up between 20% and 25% equity in the house without having to refinance their mortgage. Keep in mind that lenders won’t consider removing PMI until after about a two-year “seasoning period,” according to Keith Gumbinger, vice president of HSH.com, a mortgage information resource, “They could still deny your request,” he notes.

Monitor your property appreciation

Another way is to track your property appreciation. If your home jumps in appraised value, your equity in the home will increase. If that bump gets you over the 20% equity threshold, you can ask your lender to end PMI.

Don’t go it alone

Couples can take advantage of a dual-income mortgage loan not just to avoid higher interest rates but also to reduce any required PMI payments. “Something new, we’ve seen recently is that PMI is lower with two incomes on the loan than with a single borrower,” Gumbinger says.

Consider an FHA loan

One way to avoid private mortgage insurance entirely is to obtain an FHA loan through the Federal Housing Administration. Private mortgage insurance doesn’t extend to loans granted by the FHA, because PMI only covers conventional mortgage lenders. However, it’s worth noting that FHA loans have their own added costs. FHA borrowers have to pay FHA mortgage insurance, but it tends to be less expensive than PMI costs.

Know the PMI increments

What most first-time buyers don’t consider is that PMI rates are applied in increments. So don’t automatically assume that putting down more money will reduce your PMI. It may make more sense to hold on to those additional funds for closing costs or an emergency fund. Here is a handy calculator to decide whether or not to bump up your down payment.

Ultimately, uncovering the hidden cost of PMI will help you plan for its timely demise.

(An earlier version of this story misstated Keith Gumbinger's name.)