What Is PMI and How Does It Work?

PMI stands for private mortgage insurance. It's a fee you pay when you put less than 20% down on a conventional loan. It protects the lender, not you, if you stop making payments. And it's one of the most misunderstood costs in the homebuying process.

Here's what it actually is, what it costs, and how to get rid of it.

Why PMI Exists

Lenders consider loans with less than 20% equity riskier. If you default, the lender needs to sell the property to recoup the loan amount, and lower equity means less cushion if the market has dipped. PMI is insurance that pays the lender if that happens.

You pay for it. The lender benefits. That's the deal. And yes, it's an added monthly cost. But it's also what makes low-down-payment homeownership possible. Without it, lenders wouldn't offer 3-5% down loans at all.

What PMI Costs

PMI on a conventional loan typically runs 0.5-1.5% of the loan amount annually, depending on your credit score, loan-to-value ratio, and lender. In real monthly terms:

• $200,000 loan at 1%: $167/month

• $300,000 loan at 0.7%: $175/month

• $350,000 loan at 0.8%: $233/month
  

Your exact PMI rate depends on your credit score. A 720 score pays less than a 640 score on the same loan. Ask your lender to show you the PMI cost for your specific scenario.

PMI vs. FHA MIP: An Important Distinction

PMI is for conventional loans. FHA loans have their own mortgage insurance called MIP (mortgage insurance premium). They behave differently in one critical way:

Conventional PMI can be removed once you reach 20% equity. By law, lenders must cancel it automatically at 22% equity based on the original purchase price. You can also request cancellation at 20% equity.

FHA MIP on loans with less than 10% down now stays for the life of the loan. The only way to remove it is to refinance out of the FHA loan into a conventional loan.

This distinction matters when comparing loan options. For a buyer who plans to keep the loan for 10+ years, the conventional loan with removable PMI often makes more financial sense long-term than FHA with permanent MIP, even if the FHA loan is easier to qualify for.

Also consider most people stay in their homes, especially first homes, for about 5-7 years. In this scenario, the fact that PMI stays the length of an FHA loan is isn’t super important. You’ve built equity in those 7 years and can use that equity to purchase your next home. Given your length of (presumably) on time house payments and responsible credit usage, you should qualify for a conventional loan the second time around. Use the tools available to you and then move on when you’re done with them.

How to Get Rid of PMI

Pay down your loan balance. PMI cancels automatically when your loan reaches 78% of the original purchase price (22% equity) based on scheduled payments. That’s the worst case scenario. You can also request cancellation at 20% equity.

Appreciate your way out. If your home value increases, your equity increases even without paying down the principal. You can request an appraisal to establish the new value and then request PMI removal if you're at 20% equity based on current value. I’ve personally done this, and have helped talk my own clients through this process as well. It’s super easy.

Refinance. If rates drop meaningfully (more than 1%) and your home has appreciated, refinancing into a new conventional loan can be a smart move, resets the PMI calculation and potentially eliminates it entirely if you now have 20% equity.

Make extra principal payments. Paying extra toward principal each month accelerates the equity timeline, decreases your overall interest payments, and brings PMI cancellation closer.

Is PMI Worth It?

That depends on how you frame the question. PMI is a cost. But the alternative, waiting years to save 20% down, also has a cost: continued rent payments and missed appreciation.

On a $300,000 home appreciating at 3% per year, you gain $9,000 in year one whether you put 5% down and pay PMI or not. If PMI is $150/month ($1,800/year), you're spending $1,800 to capture $9,000 in appreciation. That's a positive exchange.

Run the actual math for your situation before deciding PMI makes buying not worth it. Check out my blog article, “PMI: Myth vs Reality” for a full breakdown with two scenarios using real numbers in today’s market.

In Charlotte, I regularly work with buyers who are paying $1,700-$2,200/month in rent. On a $300,000 home with 5% down, PMI adds roughly $150-$175/month to a mortgage payment that's already higher than their rent. The question isn't whether PMI is free. It's whether paying it is better than continuing to pay rent that builds no equity. For most buyers with a 5+ year timeline, it is.

FAQ

Can I avoid PMI without 20% down?

A few ways. Some lenders offer lender-paid PMI, where you accept a higher interest rate and the lender covers PMI. Some buyers use a piggyback loan (an 80-10-10 structure: 80% first mortgage, 10% second mortgage, 10% down). Neither is automatically better. Run the numbers on each scenario.

Does PMI protect me if I can't make payments?

No. PMI protects the lender. If you face hardship, look into forbearance options or contact your lender directly. Don't confuse PMI with any kind of buyer protection.

How do I request PMI cancellation?

Submit a written request to your lender once your loan balance reaches 80% of the original purchase price OR 80 percent of the current market value. The lender may require a new appraisal (at your expense) if you're using appreciation to establish value. Ask your servicer about the specific process.

I'm Laura Shinkle, Realtor® in Charlotte, NC specializing in first-time homebuyers. PMI is one of those costs that sounds scary (and kinda like a scam) before you understand it. It becomes a lot more manageable once you do. 828.575.6067 or [email protected].

Laura Shinkle

Charlotte's First-Time Homebuyer Specialist | Realtor®

Coldwell Banker Realty | Licensed in NC & SC

CREN | PSA | CLHMS Certified

📲 828.575.6067 | 📧 [email protected]