What is Private Mortgage Insurance (PMI)?

It’s a myth that you need to put 20% of a home’s purchase price down to get a mortgage. Lenders offer numerous loan programs with lower down payment requirements to fit a variety of budgets. If you go this route, expect to pay for private mortgage insurance (PMI). This expense is added to your monthly payment and makes your loan more expensive. But if you don’t have 20% down payment, this might be your only option.

PMI is a type of mortgage insurance that buyers are typically required to pay for a conventional loan when they make a down payment of less than 20%. This insurance helps the lender recoup money if the loan goes into default. Mortgagers are lending you money up front and therefore, stand to lose more if you default in the initial years of homeownership. Loans insured by the Federal Housing Administration, or FHA loans, also require mortgage insurance, but the guidelines are different than those for conventional loans.

In general, expect to pay between $30 and $70 per month for every $100,000 borrowed, according to Freddie Mac. Keep in mind this amount can vary based on your credit score and your loan-to-value ratio.

Typically, you can deduct the annual amount paid for PMI on your taxes, but please seek a tax professional for additional details.

Canceling PMI Coverage

The good news is you don’t have to pay PMI for the duration of the loan.

The federal Homeowners Protection Act eliminates PMI in one of three ways:

Borrower-initiated PMI cancellation
- Once your LTV ratio falls below 80%,
- Make your request in writing,
- Be current on your monthly mortgage payments,
- Have a positive payment history, and
- The home has retained its value (no junior liens).
Automatic PMI Termination – Once your LTV reaches 78% your PMI is automatically terminated by the lender.
Final PMI Termination – The lender must terminate your PMI at the mid-point of the loan even if your LTV hasn’t reached 78% yet.