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Amy Fontinelle has more than 15 years of experience covering personal finance, corporate finance and investing.
Updated June 16, 2024 Fact checked by Fact checked by Pete RathburnPete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.
Private mortgage insurance (PMI) is insurance that a mortgage lender may require you to purchase if your down payment is less than 20%. Private mortgage insurance is designed to protect the lender in case you default on the payments. However, there are a few types of PMI, making it essential to understand your options for private mortgage insurance.
Unlike most types of insurance, private mortgage insurance (PMI) protects the mortgage lender, not the individual or borrower purchasing the insurance. Private insurance companies provide PMI to help shield the lender from the risk that the borrower defaults on the payments.
Typically, lenders will lend up to a maximum of 80% of the property value you're purchasing. When a borrower makes a down payment of less than 20% of the property's loan-to-value (LTV) ratio for the mortgage exceeds 80%.
For example, if a borrower made a 10% down payment on a $100,000 home or $10,000, the loan amount of $90,000 would represent a 90% loan-to-value ratio. Ideally, the maximum risk the lender would want to take is 80% LTV or $80,000 of the $100,000 home. The higher the LTV ratio, the higher the risk profile of the mortgage for the lender.
As a result, the borrower pays for private mortgage insurance (PMI) to help reduce the lender's risk since the LTV exceeds 80%. If the borrower defaults and goes into foreclosure, the insurance policy compensates the lender.
Borrowers must pay their private mortgage insurance until they have accumulated enough equity in the home, which is usually 20%. The cost of PMI typically ranges from 0.5% to 2% of the loan balance per year but can run as high as 6%.
However, the cost can vary, depending on several factors, including the borrower's credit score, the size of the down payment, the loan type, and the loan term. Your credit score represents a numerical credit rating on your creditworthiness as a borrower based on your credit history. Several major insurance companies in the United States offer PMI and charge similar rates adjusted annually.
Suppose you put down 10% on a $200,000 home—or $20,000. You take out a mortgage loan for the remaining 90% of the property’s value, or $180,000.
Since you put down less than 20%, the lender charges private mortgage insurance (PMI), which is 0.5% of the loan balance, as shown below.
The table below compares a 30-year fixed-rate mortgage loan with a 10% down payment vs. a 20% down payment to highlight the differences in monthly mortgage costs.
The most common type of PMI is borrower-paid mortgage insurance (BPMI), which is a monthly fee in addition to your mortgage payment. After your loan closes, you pay BPMI every month until you have 22% equity in your home (based on the original purchase price).
At that point, the lender must automatically cancel BPMI as long as you’re current on your mortgage payments. Accumulating enough home equity through regular monthly mortgage payments can take several years.
The other types of PMI aren't nearly as common as borrower-paid mortgage insurance. You might still want to know how they work in case one of them sounds more appealing, or your lender presents you with more than one mortgage insurance option.
With single-premium mortgage insurance (SPMI), also called single-payment mortgage insurance, you pay mortgage insurance upfront in a lump sum at the closing.
Single-premium mortgage insurance (SPMI) lowers your monthly housing expenses compared to BPMI. It can help borrowers qualify for a mortgage or a larger loan since the monthly mortgage servicing costs are lower.
Paying SPMI up front means you won't need to monitor your loan-to-value ratio to see when PMI will be canceled, and you avoid the need to refinance to get out of PMI.
However, the risk of paying PMI upfront comes if you refinance or sell within a few years; no portion of the SPMI is refundable. Another drawback of SPMI is that it's more money out of pocket at the loan's closing.
If you can't afford to pay for the SPMI upfront, you can finance it into the mortgage loan—called single-financed mortgage insurance. However, adding SPMI to your loan balance means you'll pay interest on it for the life of the loan.
Other options include asking the seller or, in the case of a new home, the builder if they will pay the mortgage insurance by negotiating that as part of your purchase offer.
If you plan to stay in the home for three or more years, single-premium mortgage insurance may save you money. Ask your loan officer to see if this is the case. However, be aware that not all lenders offer single-premium mortgage insurance.
With lender-paid mortgage insurance (LPMI), your lender will technically pay the mortgage insurance premium. However, you will actually pay for it over the life of the loan in the form of a slightly higher interest rate.
Unlike BPMI, you can't cancel LPMI when your equity reaches 78% because it is built into the loan. Refinancing will be the only way to lower your monthly payment. Your interest rate will not decrease once you have 20% or 22% equity. Lender-paid PMI is not refundable.
The benefit of lender-paid PMI, despite the higher interest rate, is that your monthly payment could still be lower than making monthly PMI payments. That way, you could qualify to borrow more.
Split-premium mortgage insurance is a hybrid of BPMI and SPMI. With the split-premium option, you pay a portion of the mortgage insurance as a lump sum at closing and a portion monthly.
You don’t have to come up with as much cash upfront as you would with SPMI, nor do you increase your monthly payment by as much as you would with BPMI.
One reason to choose split-premium mortgage insurance is if you have a high debt-to-income ratio. When that's the case, increasing your monthly payment too much with BPMI would mean not qualifying to borrow enough to purchase the home you want.
The upfront premium might range from 0.50% to 1.25% of the loan amount. The monthly premium will be based on the net loan-to-value ratio before any financed premium is considered.
As with SPMI, you can roll it into your mortgage or ask the builder or seller to pay the initial premium. Split premiums may be partly refundable once mortgage insurance is canceled or terminated.
An additional type of mortgage insurance comes with mortgage loans insured by the Federal Housing Administration (FHA). The FHA insures mortgage loans to protect lenders against borrower default. In return, FHA mortgage loans offer benefits to borrowers that include a 3.5% down payment, particularly for first-time home buyers. FHA loans help those who can't afford the traditional 20% down payment.
However, FHA mortgages require the borrower to pay a mortgage insurance premium (MIP). Also, the homes must meet specific criteria for livability to be eligible for MIP coverage; otherwise, they are considered uninsurable.
Furthermore, MIP cannot be removed without refinancing the home. It includes both an upfront payment and monthly premiums—usually added to the monthly mortgage payment. The buyer must wait 11 years before removing the MIP from the loan if they made a down payment of more than 10%.
The cost of PMI premiums will depend on several factors.
Typically, the greater the risk to the lender, according to the above factors, the higher your PMI premium.
Rates for PMI can range from 0.50% to 6% of the original loan amount each year. However, your credit score can greatly impact the PMI rate charged by insurance companies since they adjust the rate higher or lower depending on your score.
The example below shows three borrowers who made a 10% down payment and financed the remaining $200,000 with a mortgage loan.
The example above highlights how much a borrower's credit score can impact the PMI rate. The borrower with a 620 score paid three times more than the borrower with a 680 score and five times the borrower with a 760 score.
Many companies offer mortgage insurance. Your lender—not you—will select the insurer. Nevertheless, you can get an idea of what rate you will pay by studying the mortgage insurance rate card. MGIC, Radian, Essent, National MI, United Guaranty, and Genworth are major private mortgage insurance providers.
Mortgage insurance rate cards can be confusing at first glance. Here’s how to use them.
Your rate will be the same every month, though some insurers will lower it after 10 years. However, that's just before the point when you should be able to drop coverage, so that any savings won't be that significant.
For most borrowers, MIP—required for FHA-backed loans—will be more expensive than PMI. With PMI, you won't pay an upfront premium unless you choose single-premium or split-premium mortgage insurance. However, everyone must pay an upfront premium with FHA mortgage insurance. What is more, that payment does nothing to reduce your monthly premiums.
As of 2023, the upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount. You can pay this amount at closing or finance it as part of your mortgage. The UFMIP will cost you $1,750 for every $100,000 you borrow. If you finance it, you’ll pay interest on it, too, making it more expensive over time. The seller is permitted to pay your UFMIP as long as the seller’s total contribution toward your closing costs doesn’t exceed 6% of the purchase price.
With an FHA mortgage, you'll also pay a monthly mortgage insurance premium (MIP) of 0.15% to 0.75% of the loan amount based on your down payment and loan term. As the FHA table below shows, if you have a 30-year loan for $200,000 and you're paying the FHA's minimum down payment of 3.5%, your MIP will be 0.55% for the life of the loan. Not being able to cancel your MIP can be costly.
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For 30-year FHA loans with a down payment of 10% or more, you can cancel your monthly MIP after 11 years. Without putting down 10% or more on an FHA mortgage, the only way to stop paying MIP is to refinance into a conventional loan. This step will make the most sense after your credit score or LTV increases considerably.
Refinancing means paying closing costs, however, and interest rates might be higher when you're ready to refinance. Higher interest rates plus closing costs could negate any savings from canceling FHA mortgage insurance. Furthermore, you can't refinance if you're unemployed or have too much debt relative to your income.
Private mortgage insurance (PMI) is required if you put less than 20% down when buying a home. You can request that PMI be cancelled when you have 20% equity in the home, but it's automatically cancelled when you reach 22% equity.
For mortgage loans insured by the Federal Housing Administration (FHA), you're required to buy mortgage insurance protection (MIP) if your down payment is less than 20%. MIP costs 1.75% either upfront or built into your mortgage payments. You may also pay a monthly mortgage insurance premium (MIP) of 0.15% to 0.75% of the loan amount.
You can pay monthly as part of your mortgage payment or you can pay a lump-sum upfront amount called single-premium mortgage insurance. There is also lender-paid mortgage insurance, but the cost is typically built into the loan's interest rate, meaning you'll pay for it eventually.
Mortgage insurance costs borrowers money but enables them to become homeowners sooner by reducing the risk to financial institutions of issuing mortgage loans to borrowers with small down payments. You might find it worthwhile to pay mortgage insurance premiums if you want to own a home sooner rather than later. Premiums can be canceled once your home equity reaches 80%. However, with FHA-insured loans, mortgage insurance premiums continue for the life of the loan unless you refinance the loan into a conventional mortgage.
