What Is PMI? How Private Mortgage Insurance Works

Buying a home usually has a monster obstacle: coming up with a sufficient down payment. How much you put down on a conventional mortgage — one that's not federally guaranteed — will determine whether you'll have to buy PMI, or private mortgage insurance.

Typically a lender will require you to buy PMI if you put down less than the traditional 20%.

What is private mortgage insurance?

PMI is insurance for the mortgage lender’s benefit, not yours. You pay a monthly premium to the insurer, and the coverage will pay a portion of the balance due to the mortgage lender in the event you default on the home loan.

The insurance does not prevent you from facing foreclosure or experiencing a decrease in your credit score if you get behind on mortgage payments.

The lender requires PMI because it is assuming additional risk by accepting a lower amount of upfront money toward the purchase. You can avoid PMI by making a 20% down payment.

Mortgage insurance for FHA loans, backed by the Federal Housing Administration, operates a little differently from PMI for conventional mortgages. VA loans, backed by the U.S. Department of Veterans Affairs, don't require mortgage insurance, but do include a "funding fee." USDA mortgages, backed by the U.S. Department of Agriculture, have an upfront and annual fee.

» MORE: What is mortgage insurance?

How much is PMI?

The average annual cost of PMI typically ranges from 0.58% to 1.86% of the original loan amount, depending on your credit score, according to a 2022 report from the Urban Institute's Housing Finance Policy Center. Borrowers with excellent credit get the lowest PMI rates.

Those averages were calculated using a $289,500 mortgage — the loan balance you’d have if you bought a $300,000 home and made a 3.5% down payment.

At those rates, PMI could cost anywhere from around $1,679 to $5,385 per year, or about $140 to $449 a month.

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 is likely higher.

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

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 in the “projected payments” section.

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?

Private mortgage insurance is not tax deductible for the 2022 tax year. The itemized deduction for mortgage insurance has expired.

When can you stop paying PMI?

Once your mortgage principal balance is less than 80% of the original appraised value or the current market value of your home, whichever is less, you can generally get rid of PMI. Often there are additional requirements, such as a history of timely payments and the absence of a second mortgage.

» MORE: Make a down payment without wrecking your finances