What is PMI and How Do You Remove It?

What Is PMI?

PMI stands for Private Mortgage Insurance. It is a type of insurance that protects the lender—not the homeowner—in the event a borrower stops making mortgage payments.

This is one reason many buyers dislike PMI. They're paying for insurance that doesn't directly benefit them. I know...not exactly the greatest sales pitch.

However, PMI serves an important purpose. Without it, many lenders would require significantly larger down payments before approving loans.

In other words: PMI helps make low down payment homeownership possible.

When Is PMI Required?

PMI is typically required on conventional loans when the borrower puts less than 20% down.

This requirement exists because a smaller down payment creates more perceived risk for the lender. PMI helps offset that risk.

Why PMI Exists

Imagine two buyers purchasing identical homes. Buyer #1 puts 20% down. Buyer #2 puts 5% down.

If home values decline or financial hardship occurs, Buyer #2 has less equity in the property and represents a higher risk to the lender. PMI allows lenders to be comfortable approving loans with smaller down payments while still managing that risk.

Without PMI, many first-time buyers would struggle to enter the housing market. So while PMI may not be anyone's favorite line item on a mortgage statement, it serves a pretty important purpose.

How Much Does PMI Cost?

The cost of PMI varies from borrower to borrower. Several factors affect pricing, including:

• Credit score

• Down payment amount

• Loan size

• Occupancy type

• Loan program

As a general guideline, PMI typically costs anywhere between 0.1% and 1.0% of the loan amount annually. For example, a $400,000 loan might have PMI somewhere in the range of approximately $35 to $350 per month. Although it is a large range, that is because credit score and down payment play a critical part.

If you've got a larger down payment saved up, maybe 15%, your insurance cost will be on the lower end.  If you've got a lower credit score, insurance costs will be on the higher side.  My experience is that most folks with good credit but a smaller 3% down payment fall right in the middle of that range.  Credit score is the primary driver to higher PMI costs

Why PMI May Cost Less Than You Think

Many buyers hear the words "mortgage insurance" and assume the cost is substantial although oftentimes it is not.

More importantly, buyers should compare the cost of PMI against the cost of waiting.

Let's say it takes a buyer five additional years to save a 20% down payment. During those five years:

• A $400k home could appreciate to $475k (or more in many markets)

• Mortgage rates may rise - unknown variable

• If you're renting at $2,500/mo, you gave an extra $150k to your landlord that you could have leveraged for yourself

• Tax advantages are deferred or lost altogether.

Meanwhile, you're patiently saving while the house you're hoping to buy may be getting more expensive. Not exactly the plan you might have been intending on. In some cases, the cost of waiting can exceed the total cost of PMI. That's why PMI should be evaluated as part of a larger financial picture and homebuying strategy.

The Biggest PMI Myth

One of the most common misconceptions is: "Once I have PMI, I'm stuck with it forever."

Fortunately, that's not typically true. PMI is not a timeshare. For most borrowers, PMI is temporary.

How Can You Remove PMI?

There are several ways homeowners may eliminate PMI over time.

Option #1: Pay Down Your Mortgage Balance

As you make monthly payments, your loan balance gradually decreases. Eventually, your equity position improves enough that PMI may no longer be required.

Nothing fancy here. Your balance goes down, your equity goes up, and eventually PMI may go away.

Option #2: Home Appreciation

Sometimes homeowners gain equity simply because their property value increases. If your home's value has risen significantly since purchase, you may qualify for PMI removal earlier than expected.

This often requires a new appraisal by your existing lender to document the property's current value. In other words, your house may have been quietly doing some of the work for you.

Option #3: Refinance Your Mortgage

If interest rates and market conditions make sense, refinancing may remove PMI if sufficient equity has been established.

Refinancing isn't always the best solution, but it can be an option in some circumstances. The key words here are "if it makes sense."

Should You Wait Until You Have 20% Down?

This is one of the most important questions buyers face. Sometimes waiting makes sense. But often, it doesn't.  In fact, in my 17 year career and thousands of families helped, there have been very few scenarios where deferring a home purchase primarily for down payment purposes has benefited the client.

The answer depends on factors such as:

• Current home prices

• Market conditions

• Interest rates

• Rent costs

• Savings goals

• Personal finances

For some buyers, purchasing with less than 20% down allows them to become homeowners sooner, begin building equity earlier, preserve emergency savings, and maintain greater financial flexibility.

There isn't a mortgage rule that says, "Thou shalt put 20% down."

Sometimes 20% down is a good strategy. Sometimes 5% down and paying PMI is the better strategy.

The goal should be choosing the option that makes the most sense for your financial situation—not simply avoiding a three-letter acronym.

PMI vs. Renting

Here's a question many buyers never ask: What is the cost of continuing to rent?

While PMI has a monthly cost, rent payments typically:

• Build no equity

• Provide no ownership stake

• May increase annually

This doesn't mean buying is always better than renting. It simply means PMI should be compared against all available options—not viewed in isolation.

Key Takeaway

PMI often gets a bad reputation because it's an additional monthly expense. But for many buyers, PMI is what makes homeownership possible without waiting years to save a 20% down payment.

The important thing to remember is this:

PMI is usually temporary.

And when used strategically, it can help buyers enter the housing market sooner, start building equity earlier, and achieve their homeownership goals faster.

Rather than asking:

"How do I avoid PMI at all costs?"

A better question might be:

"Does paying PMI help me achieve my goals sooner?"

For many buyers, the answer is yes.

And while nobody is likely to send their PMI company a Christmas card thanking them for their service, sometimes paying a relatively small monthly cost can be a strategic tool that helps you get where you want to go sooner.

-Brian Kimball, Sr. Mortgage Advisor/Team Leader, The Lighthouse Group at Waterstone Mortgage