When you are buying a home with a smaller down payment, you may notice an additional cost included in your monthly mortgage payment.
This cost is often called private mortgage insurance, or PMI.
PMI can help borrowers qualify for certain conventional mortgages without making a large down payment, but it also increases the monthly cost of owning a home.
Understanding what PMI is, why lenders require it, and when you may be able to stop paying it can help you better understand the true cost of your mortgage.
What Is PMI on a Mortgage?
Private mortgage insurance, commonly called PMI, is insurance that protects the lender if a borrower stops making mortgage payments.
PMI is typically associated with conventional mortgages where the borrower has less than 20% equity in the home.
It is important to understand that PMI protects the lender, not the homeowner.
However, PMI can make homeownership more accessible because it may allow borrowers to purchase a home without saving enough money for a 20% down payment.
The exact PMI requirements and costs depend on factors such as the loan, down payment, credit profile, and lender guidelines.
Why Do Lenders Require PMI?
A larger down payment gives the borrower more equity in the property from the beginning.
When a borrower makes a smaller down payment, the lender is financing a larger percentage of the home’s value.
PMI provides additional protection for the lender when the loan represents a higher percentage of the property’s value.
For example, suppose you purchase a $300,000 home and make a 10% down payment of $30,000.
Your mortgage would be approximately $270,000.
Because your initial equity is less than 20%, PMI may be required on a conventional mortgage.
The exact requirements can vary, so your mortgage professional can explain whether PMI applies to your specific loan.
How Much Does PMI Cost?
There is no single PMI cost that applies to every borrower.
The amount can depend on several factors, including:
- Loan amount
- Down payment
- Credit history
- Loan-to-value ratio
- Type of mortgage
- Lender requirements
PMI is commonly included as part of the borrower’s monthly mortgage payment, although there can be different ways PMI is structured depending on the loan.
Because PMI can affect your monthly housing costs, it is important to include it when determining how much home you can comfortably afford.
Bromley’s mortgage affordability calculator also includes PMI when estimating potential monthly housing expenses, allowing borrowers to see how mortgage insurance can affect the overall payment.
Do All Mortgages Require PMI?
No.
PMI is generally associated with conventional mortgages when the borrower has less than 20% equity in the property.
Other mortgage programs can have different forms of mortgage insurance or guarantee fees.
For example, FHA loans use mortgage insurance under their own rules, while VA loans have a different fee structure.
This is why it is important to compare the complete cost of different mortgage programs rather than assuming that every loan handles mortgage insurance in the same way.
Your mortgage professional can help you understand how mortgage insurance works with the loan programs you are considering.
Can You Avoid PMI With a Smaller Down Payment?
Depending on the mortgage program, there may be ways to purchase a home without traditional PMI even if you do not have a 20% down payment.
Different loan programs have different requirements and costs.
Some borrowers may also choose to make a larger down payment specifically to avoid PMI on a conventional mortgage.
However, putting more money into the down payment is not automatically the best choice for everyone.
Using a large portion of your savings for a down payment could leave you with less money for closing costs, emergency savings, moving expenses, repairs, and other costs of homeownership.
The best option depends on your financial situation and long-term goals.
How Does PMI Affect Your Monthly Mortgage Payment?
PMI adds another expense to your monthly housing payment.
For example, your monthly mortgage costs could include:
- Principal
- Interest
- Property taxes
- Homeowners insurance
- PMI
- HOA dues, if applicable
This is why looking only at principal and interest can give you an incomplete picture of what you will actually pay each month.
When comparing homes or mortgage options, consider the complete monthly payment.
A home with a lower purchase price may not always have the lowest total monthly cost if taxes, insurance, HOA dues, or PMI are significantly different.
When Can PMI Be Removed?
One of the biggest questions borrowers have is when they can stop paying PMI.
For many conventional mortgages, PMI can eventually be removed when the borrower has built sufficient equity in the property and meets the applicable requirements.
This can happen as you pay down your mortgage balance.
It can also happen if the value of your home increases, although the requirements for using an increased property value can be different.
The specific rules depend on your mortgage and applicable requirements, so you should contact your mortgage servicer when you believe you may be eligible for PMI removal.
Can You Request PMI Removal?
In some circumstances, you may be able to request cancellation of PMI once you have built enough equity in the property and meet the applicable requirements.
Your mortgage servicer can explain the process and determine whether you qualify.
You may need to provide information or meet certain conditions before the PMI payment can be removed.
Do not assume that PMI will automatically disappear simply because your home has increased in value.
Check your mortgage documents and speak with your servicer to understand the specific requirements that apply to your loan.
Can Paying Down Your Mortgage Help Remove PMI?
Yes, paying down your mortgage can help you build equity.
As your principal balance decreases, the amount you owe compared with your home’s value also decreases.
For example, if you originally purchased a home with a small down payment, making regular mortgage payments gradually increases your ownership stake in the property.
Additional principal payments may also help you build equity faster.
However, before making large extra payments, consider your overall financial situation.
You may want to maintain an emergency fund and account for other homeownership expenses before putting additional savings toward the mortgage.
Can a Higher Home Value Help You Get Rid of PMI?
Potentially.
If your home increases significantly in value, you may have more equity than you originally had when you purchased the property.
Depending on the mortgage and applicable requirements, an updated valuation may sometimes be used when determining whether PMI can be removed.
The process and requirements can vary.
If you believe your home’s value has increased enough to affect your PMI, contact your mortgage servicer and ask what options are available.
Is PMI Always a Bad Thing?
Not necessarily.
Some borrowers view PMI as an unnecessary expense because it increases the monthly payment.
However, PMI can also allow buyers to purchase a home sooner instead of waiting several additional years to save a 20% down payment.
For example, someone who has a stable income and enough savings for a 5% or 10% down payment may decide that purchasing a home now makes more sense than waiting several years to avoid PMI.
The decision depends on the borrower’s financial situation, homeownership goals, and the overall cost of the mortgage.
Should You Put 20% Down to Avoid PMI?
Not necessarily.
A 20% down payment can help you avoid PMI on many conventional mortgages, but saving that much money is not practical or beneficial for every borrower.
Consider what would happen to your finances after making the down payment.
Would you still have enough money for:
- Emergency savings
- Closing costs
- Moving expenses
- Home repairs
- Maintenance
- Other unexpected expenses
Sometimes a smaller down payment with PMI may allow you to purchase a home while keeping more cash available.
The right decision depends on your complete financial picture rather than one mortgage rule.
How Bromley Mortgage Team Can Help
Understanding PMI is an important part of comparing mortgage options.
The right loan depends on more than the interest rate. Your down payment, credit profile, monthly budget, loan program, and long-term goals can all affect which mortgage makes sense for you.
Bromley Mortgage Team provides personalized mortgage solutions and helps borrowers understand different financing options throughout the homebuying process.
If you are considering a smaller down payment and are concerned about PMI, discussing your options with a mortgage professional can help you understand how mortgage insurance could affect your monthly payment and overall homeownership costs.
Conclusion
PMI is a type of mortgage insurance that can allow borrowers to qualify for certain conventional mortgages with less than a 20% down payment.
While PMI adds to your monthly housing costs, it can also help you purchase a home without waiting years to save a larger down payment.
As you build equity through mortgage payments, and potentially through changes in your home’s value, you may eventually become eligible to stop paying PMI depending on your loan and applicable requirements.
Before deciding how much to put down, look at the complete financial picture.
Consider your monthly payment, available savings, closing costs, emergency fund, and long-term homeownership goals.
Understanding how PMI works can help you compare mortgage options more confidently and choose a financing strategy that fits your situation.
