What Is PMI—and How to Avoid It Like a Pro
The Money Class You Never Got in School
What Is PMI—and How to Avoid It Like a Pro
You’re ready to buy a house. You’ve been stalking Zillow, calculating mortgage payments, maybe even started saving for a down payment. And then someone hits you with the phrase “PMI.”
If your first thought was “Wait, what’s that?”—you’re not alone. Private Mortgage Insurance, or PMI, is one of the sneakiest money drains in the homebuying game. And if you don’t understand it, you could end up paying hundreds per month for… absolutely nothing that benefits you.
What Even Is PMI?
PMI stands for Private Mortgage Insurance. It’s a fee lenders charge when you can’t put down at least 20% on a home. Why? Because with a smaller down payment, you’re seen as a risk—and PMI protects the lender, not you, if you stop making payments.
You’re literally paying to insure someone else’s money. It doesn’t build equity. It doesn’t protect your home. It’s just an extra monthly charge tacked onto your mortgage.
When Do You Have to Pay PMI?
Here’s the rule: if your down payment is under 20% on a conventional loan, expect PMI.
Let’s say you’re buying a $300,000 house. If you don’t have $60,000 for a down payment (that’s 20%), you’ll likely owe PMI. The less you put down, the more you’ll pay in PMI.
How Much Does PMI Actually Cost?
Most PMI rates range from 0.3% to 1.5% of your loan amount per year. It depends on your credit score and how much you put down. Let’s break it down:
| Home Price | Down Payment (5%) | Loan Amount | Monthly PMI (est.) | Annual PMI |
|---|---|---|---|---|
| $200,000 | $10,000 | $190,000 | $133 | $1,596 |
| $300,000 | $15,000 | $285,000 | $200 | $2,400 |
| $400,000 | $20,000 | $380,000 | $266 | $3,192 |
Multiply that by 12–60 months (depending on how long you carry PMI) and you could be out thousands just for existing in a lower tax bracket.
How Long Do You Have to Pay PMI?
By law, lenders must cancel PMI when your mortgage hits 78% of the home’s original value. But you can request removal sooner—usually once you reach 20% equity.
Heads up: equity = the value of your home minus how much you still owe. So if your house appreciates or you pay extra on your mortgage, you might hit that threshold faster than expected.
How to Get Rid of PMI Faster
- Make extra principal payments each month
- Request a new appraisal if home values rise in your area
- Refinance once your home gains value or your income improves
You don’t have to be stuck with PMI forever. But you also don’t want to ignore it and waste money that could’ve gone toward savings, investing, or literally anything better than lender insurance.
How to Avoid PMI in the First Place
If you’re house-hunting right now, there are ways to dodge PMI entirely—even if you’re not sitting on a $60k down payment.
Option 1: Put 20% Down
This is the cleanest way to avoid PMI. No games, no monthly fee. But for most people, that’s a tough ask—especially in cities where the median home price is pushing $400k.
Option 2: Use a Piggyback Loan
This is also called an 80/10/10 loan. Here’s how it works:
- You take a loan for 80% of the home’s value
- You take a second loan for 10%
- You put down the last 10% yourself
No PMI, but now you’re managing two loans. Do the math carefully and make sure both interest rates work in your favor.
Option 3: VA Loans (If You Qualify)
If you’re a veteran, you may be eligible for a VA loan—which doesn’t require PMI even with 0% down. It’s one of the best mortgage options out there, full stop.
Option 4: Lender-Paid PMI (But Read the Fine Print)
Some lenders offer to cover your PMI—but in exchange, they’ll charge a slightly higher interest rate. Depending on how long you keep the loan, this could cost more over time. Run the numbers or ask a loan officer you trust.
What About FHA Loans?
FHA loans are popular for first-time buyers because they allow low down payments (as low as 3.5%) and looser credit requirements. But here’s the catch: they come with mortgage insurance—and it’s baked in for the life of the loan if your down payment is under 10%.
Translation: if you go FHA, you're paying some form of PMI the whole time unless you refinance later into a conventional loan.
What If You Already Have PMI?
If you're already paying PMI, don’t panic—but don’t ignore it either. Here’s your game plan:
- Check how much equity you have. Use your loan statements or a free tool like Zillow to estimate home value.
- Start throwing extra money at the principal, even $50/month can speed things up.
- Set a calendar reminder to revisit PMI cancellation every 6 months. If you hit 20% equity, request removal in writing.
Lenders won’t always volunteer to cancel it early, but you have the right to ask once you qualify.
Is Paying PMI Always a Bad Idea?
Honestly? Not always. If skipping PMI means waiting 5 more years to buy a home, while prices and rents keep rising, it might make sense to bite the bullet and pay it short-term.
Think of PMI like paying a toll to get into the game. As long as you have a plan to get rid of it, it might be worth it. But if you’re not aware of it—or think it’s just “part of the mortgage”—you’re probably leaving money on the table.
Final Take
PMI is one of those silent costs that can wreck your budget if you’re not paying attention. But once you understand how it works—and how to get around it—it’s just another piece of the puzzle, not a dealbreaker.
Put in the time to learn the rules now, and you’ll save thousands later. Whether you’re buying your first house, refinancing, or planning ahead, just know: PMI is optional if you play your cards right.
You’re in MoneyMode now. Don’t let lender insurance eat your equity before you even build it.
