Buying a Home

What is PMI and how do I avoid it?

By Steve Lockhart

The short answer

PMI means private mortgage insurance, and the first thing to know is that it protects the lender, not you.

Full answer

PMI means private mortgage insurance, and the first thing to know is that it protects the lender, not you. On a conventional loan with a down payment under 20 percent, lenders typically require PMI because the loan is a larger share of the home's value, and the borrower pays the premium, usually as part of the monthly payment. FHA loans have their own mortgage insurance, called MIP, which works differently, so the two should not be confused. The most direct way to avoid PMI is a down payment of 20 percent, or close enough to it that the lender waives the requirement. If 20 percent is not realistic, the other common options are lender-paid mortgage insurance, where the lender pays the premium in exchange for a higher interest rate, and comparing quotes, because the premium amount varies with your credit score, the size of your down payment, the loan program, and the lender. There is no single price, and most buyers do not need to pay the first number they are quoted. It is also worth planning the exit. On most conventional loans, federal rules give you the right to request that PMI be removed once your loan balance reaches 80 percent of the home's original value, and the lender must remove it automatically once the balance reaches 78 percent under the original payment schedule, assuming your payments are current. That means buyers who make extra principal payments can retire PMI faster, which is real money back every month. The exact provisions vary by loan program, so the practical move is to ask your lender at closing when PMI can be removed and what it takes.

Go a little deeper

Frequently asked

Questions buyers often follow up on

Is PMI the same as FHA mortgage insurance?

No. PMI is a private insurer's product on conventional loans with less than 20 percent down. FHA loans carry their own mortgage insurance premium: an upfront charge plus an annual premium, on every FHA loan regardless of down payment. The two programs insure differently and their costs work differently.

Can I get PMI removed early by making extra payments?

On most conventional loans you can request removal once you reach 80 percent loan to value, and automatic removal is required at 78 percent when payments are current. Extra principal payments reach those thresholds sooner, and some loans allow removal based on a current appraisal, so ask how your specific loan handles it.

Does a larger down payment always avoid PMI?

A down payment of 20 percent avoids PMI on a conventional loan, and the requirement generally becomes less expensive as your down payment grows, so even moving from 5 to 10 percent usually lowers the cost. Your lender's rate sheet shows how each down payment level changes the premium.

The Lockhart Method

Your Home | My Strategy | Proven Results

My strategy: choose the down payment deliberately instead of by default. If 20 percent fits your reserves, it usually pays for itself by removing PMI and shrinking the loan, and if it does not, we compare the alternatives and know the exit date before you sign.

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