What Is PMI? How Private Mortgage Insurance Works

Private mortgage insurance, or PMI, protects the lender in case you default. You're usually required to pay for PMI if you make a down payment that's less than 20% on a conventional loan.
Barbara MarquandMar 8, 2021

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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.

PMI is insurance for the mortgage lender's benefit, not yours.

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.

How much is PMI?

The average annual cost of PMI typically ranges from 0.58% to 1.86% of the original loan amount, according to Genworth Mortgage Insurance, Ginnie Mae and the Urban Institute.

Those averages were calculated using a $241,250 mortgage — the loan balance you’d have if you bought a $250,000 home and made a 3.5% down payment.

At those rates, PMI could cost anywhere from around $1,399 to $4,487 per year, or about $117 to $374 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.

Is PMI tax deductible?

Private mortgage insurance is currently tax deductible. Congress extended the tax deduction for mortgage insurance premiums, which had expired at the end of 2017, through the end of 2020.

The amount paid for private mortgage insurance is treated as mortgage interest on your tax return. To claim the deduction for the 2020 tax year, the insurance contract must have been issued after 2006.

The amount you can deduct is reduced and may be eliminated if your adjusted gross income is more than $100,000 ($50,000 if married but filing separately) on Form 1040 or 1040-SR, line 8b.

You can't deduct mortgage insurance premiums if your adjusted gross income is more than $109,000, or $54,500 if married but filing separately.

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.

Frequently asked questions

PMI stands for private mortgage insurance, a type of insurance policy that protects the lender if a borrower defaults on a home loan. Lenders usually require you to pay for PMI if you put less than 20% down on a conventional mortgage.

There are a couple of ways that you can avoid PMI without making a 20% down payment. With an 80-10-10 loan, also called a piggyback loan, you make a 10% down payment and have two mortgages that cover the other 90%. Though uncommon, some lenders will offer lender-paid mortgage insurance. The catch? You'll pay a higher interest rate to help cover the cost.

Yes, your credit score affects how much private mortgage insurance will cost you. A borrower with a higher credit score would likely pay a lower monthly premium for PMI than someone who has a lower credit score, even with the same down payment and mortgage amount.

Paying private mortgage insurance adds to your monthly mortgage payment, but it doesn't have any negative effects beyond costing you some extra cash. On the plus side, PMI can allow you to buy a home — and begin building home equity — more quickly than if you waited until you saved up a 20% down payment.

No, PMI does not decrease over time. However, if you have a conventional mortgage, you'll be able to cancel PMI once your mortgage balance is equal to 80% of your home's value at the time of purchase.

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