If you purchase a home with a conventional loan and put down less than 20% of the purchase price, your lender will require you to pay Private Mortgage Insurance (PMI). PMI is an extra fee added to your monthly mortgage payment that protects the lender in case you default on your loan.
How Much Does PMI Cost?
PMI is not a fixed fee; it typically ranges from 0.5% to 1.5% of your total loan amount annually. For a $300,000 mortgage, this translates to $1,500 to $4,500 per year, or an extra $125 to $375 added to your monthly payment.
The exact cost of your PMI depends on your credit score, your down payment percentage, and your debt-to-income (DTI) ratio. Borrowers with higher credit scores and down payments closer to 20% pay significantly lower PMI premiums.
"PMI protects the lender, not you. However, paying it allows you to purchase a home years sooner without waiting to save a full 20% down payment."
Strategies to Avoid or Eliminate PMI
Paying PMI can add a substantial amount to your monthly payment. Fortunately, there are several ways to avoid or cancel it:
1. Put Down 20% or More
The simplest way to avoid PMI is to pay a 20% down payment. This instantly eliminates the lender's requirement for mortgage insurance.
2. Request Automatic or Manual Cancellation
Under the Homeowners Protection Act, conventional lenders must automatically cancel your PMI once your principal balance reaches 78% of the original purchase value of your home. You can also request cancellation in writing once your balance drops to 80%.
3. Refinance Your Mortgage
If your home value has increased significantly due to market growth or renovations, your home equity may now exceed 20% of its current market value. Refinancing your mortgage into a new loan will eliminate the PMI requirement entirely, even if you originally paid less than 20% down.