What Is PMI? How Private Mortgage Insurance Works

For many home buyers, one of the largest obstacles is saving up for a down payment. The larger your down payment is, the less risk you pose to the institution lending you the mortgage. That’s where private mortgage insurance comes in, as it allows you to make a smaller down payment while offsetting some of the risk to the lender.

What is private mortgage insurance?

Private mortgage insurance, or PMI, is a type of coverage you buy if you get a conventional mortgage — one that isn't federally guaranteed — and put down less than 20% to purchase a home or have less than 20% equity when refinancing.

PMI is insurance for the mortgage lender’s benefit, not yours. The coverage will pay a portion of the balance due to the mortgage lender in the event you default on the home loan. Usually, you pay for PMI monthly as part of your mortgage payment. The insurance does not prevent you from facing foreclosure or experiencing a decrease in your credit score if you get behind on mortgage payments.

» MORE: What is mortgage insurance?

How much does PMI cost?

The average annual cost of PMI typically ranges from $30 to $70 per $100,000 borrowed, according to Freddie Mac. Borrowers with excellent credit get the lowest PMI rates.

This means that if you got a $350,000 mortgage, you can expect to pay between $105 and $245 a month towards PMI.

The cost of private mortgage insurance depends on several factors:

• The size of the mortgage loan. The more you borrow, the more you pay for PMI.

• Down payment amount. The more money you put down for the home, the less you pay for PMI.

• Your credit score. PMI will cost less if you have a higher credit score. Generally you'll see the lowest PMI rates for a credit score of 760 or above.

• The type of mortgage. PMI may cost more for an adjustable-rate mortgage than a fixed-rate mortgage. Because the rate can go up with an adjustable-rate mortgage, the loan is riskier than a fixed-rate loan, so PMI tends to be higher.

Estimating the cost of PMI before you get a mortgage can help you determine how much home you can afford.

How to pay for PMI

Typically, the PMI cost, called a “premium,” is added to your monthly mortgage payment. You can see the premium on your Loan Estimate and Closing Disclosure mortgage documents.

Sometimes lenders offer the option to pay the PMI cost in one upfront premium or with a combination of upfront and monthly premiums.

» MORE: Calculate your PMI

Is PMI tax-deductible?

No, private mortgage insurance is currently not tax deductible on a personal residence; however, insurance premiums can be deducted in the year paid for investment or rental properties.

How do I get rid of PMI?

Once your mortgage principal balance is less than 80% of the original appraised value, you can ask the mortgage loan servicer to cancel PMI. Often there are additional requirements, such as a history of timely payments and the absence of a second mortgage.

If you don't request cancellation, the lender or service must cancel PMI once your mortgage balance reaches 78% of the original value of the home.

» MORE: How to save for a down payment

Save money on PMI

Some state housing authorities offer conventional home loans with reduced mortgage insurance costs and below-market interest rates for first-time home buyers. Check out the programs available in your state for details.

» MORE: First-time home buyer programs by state

Other low-down-payment mortgage options

Conventional loans with private mortgage insurance aren't the only choice if you have limited cash for a down payment. A government-backed loan may fit the bill:

FHA loans, insured by the Federal Housing Administration, require as little as 3.5% down and are a good option for borrowers with lower credit scores.

USDA loans, backed by the U.S. Department of Agriculture, require no down payment and are for lower- to moderate-income home buyers in designated rural areas.

VA loans, guaranteed by the Department of Veterans Affairs, require no down payment and are for active-duty and veteran military members.

PMI requirements by loan type

» MORE: Best lenders for low- and no-down-payment mortgages