PMI explained: what it costs, when it drops, and how to avoid it

Private mortgage insurance is the monthly fee you pay when your down payment is less than 20%. It protects the lender if you stop making payments. Not you. The lender. You pay for insurance that covers someone else's risk. That's the deal, and it's non-negotiable on conventional loans with less than 20% equity. But PMI isn't permanent, it isn't always expensive, and sometimes paying it is the smarter financial move compared to waiting years to save a bigger down payment.

How much PMI actually costs

PMI rates typically run 0.5% to 1.5% of the loan amount per year. The range is wide because your rate depends on three things: how much you put down, your credit score, and the loan type.

Let's use a real example. You're buying a $400,000 home with 10% down ($40,000). Your loan amount is $360,000.

At the low end (0.5% annually): $360,000 x 0.005 = $1,800/year = $150/month

At the midpoint (1.0%): $360,000 x 0.01 = $3,600/year = $300/month

At the high end (1.5%): $360,000 x 0.015 = $5,400/year = $450/month

That's a $300/month spread depending on your profile. A borrower with a 760 credit score putting 15% down might pay $150/month. A borrower with a 660 credit score putting 5% down could pay $400+.

Three factors determine where you fall:

Down payment percentage. The less you put down, the higher the PMI rate. At 15% down, you're a lower risk than at 5% down. Lenders price that's how it prices them.

Credit score. This is the biggest lever you control. A 760+ score might get you 0.5% PMI. A 680 score on the same loan could mean 1.2%. That's the difference between $150/month and $360/month on a $360,000 loan.

Loan type and term. Fixed-rate loans generally get lower PMI rates than ARMs. 30-year terms cost more than 15-year terms because the lender's risk exposure is longer.

PMI cost table

Here's what PMI looks like across different credit score and down payment combinations on a $360,000 loan:

These are typical rates from major PMI providers. Your actual rate may differ based on the insurer your lender uses and the specific loan program.

The table makes one thing obvious: improving your credit score before buying saves real money. Going from 680 to 760 with 10% down cuts your PMI from $285 to $135. That's $150/month, or $1,800/year, for as long as you carry PMI.

When PMI automatically drops

The Homeowners Protection Act of 1998 gives you two rights:

Automatic termination at 78% LTV. Your lender must cancel PMI when your loan balance reaches 78% of the original purchase price, based on the amortization schedule. You don't have to ask. They're required by law to remove it.

Right to request cancellation at 80% LTV. You can ask your lender to remove PMI once you reach 80% loan-to-value. This requires a written request, and the lender may require a current appraisal to confirm the value.

The key word in automatic termination is "original purchase price." Even if your home has appreciated 30%, the automatic cancellation is based on the price you paid, not the current value. Requesting cancellation early is where appreciation helps.

How long until 78% LTV?

On a 30-year fixed mortgage at 6.75%, most of your early payments go to interest. Principal paydown is slow.

Using our $400,000 home with 10% down ($360,000 loan at 6.75%):

• Original home value: $400,000
• 78% LTV target: $312,000 loan balance
• Starting balance: $360,000
• Gap to close: $48,000 in principal

Through regular payments alone, you hit the $312,000 balance at approximately month 108, or about 9 years. That's 9 years of PMI payments.

At the midpoint rate of $300/month, that's $32,400 in total PMI before it automatically drops. At $150/month, it's $16,200. At $450/month, it's $48,600.

Those numbers make it worth pursuing early cancellation.

How to request cancellation early

You don't have to wait 9 years. If your home has appreciated or you've made extra principal payments, you can request cancellation once your equity hits 20%. Here's the process:

1. Check your current loan balance. Your monthly statement or lender's online portal shows this. You need the balance to be at or below 80% of your home's current value.

2. Write a formal request. Send a written letter to your loan servicer requesting PMI cancellation. Include your loan number, property address, and a statement that you believe you've reached 20% equity.

1. Expect an appraisal requirement. Most servicers will require a new appraisal to verify the home's value. This typically costs $300 to $500, and you pay for it. Some servicers accept a broker price opinion (BPO) for less.

2. Meet seasoning requirements. Most lenders require the loan to be at least 2 years old before they'll consider value-based cancellation (where appreciation, not just paydown, gets you to 80%). If your loan is less than 2 years old, you generally need to reach 80% LTV through payments alone or a combination of payments and improvements.

3. Maintain a clean payment history. Lenders require no 60-day late payments in the past 2 years and no 30-day late payments in the past 12 months.

6. Have no subordinate liens. No home equity loans or lines of credit attached to the property.

If your home has appreciated — say 15% or more — this process can save you years of PMI payments. A home bought at $400,000 that's now worth $475,000 with a $345,000 balance already sits at 72.6% LTV. You'd qualify immediately.

Five ways to avoid PMI entirely

1. put 20% down

The straightforward path. On a $400,000 home, that's $80,000. No PMI, lower monthly payment, better interest rate. The downside: saving $80,000 takes most people years, during which home prices keep rising.

2. piggyback loan (80-10-10)

Take a first mortgage for 80% of the home price, a second mortgage (home equity loan or HELOC) for 10%, and put 10% down. The first mortgage has no PMI because it's at 80% LTV. The second mortgage has a higher interest rate, but the combined payment is often less than a single loan with PMI.

The catch: the second mortgage rate is usually 2-3% higher than the first. And you have two loan payments to manage. Run the numbers for your specific situation before assuming this saves money.

3. lender-Paid PMI (LPMI)

The lender pays your PMI upfront in exchange for a higher interest rate on your loan. Instead of 6.75% plus $250/month PMI, you might get 7.0% with no separate PMI payment.

Lender-paid PMI sounds good. It usually isn't. The higher rate stays for the life of the loan, while borrower-paid PMI drops off at 80% equity. On a 30-year loan, you could pay more in extra interest than you would have paid in PMI. LPMI only makes sense if you're selling or refinancing within a few years.

4. VA or USDA loans

VA loans (for veterans and active military) require no down payment and no PMI. There's a one-time funding fee (1.25% to 3.3% of the loan), but no monthly insurance premium. This is one of the best mortgage deals available.

USDA loans (for rural and some suburban areas) also require no down payment. They have an upfront fee (1%) and an annual fee (0.35%), which is lower than typical PMI.

If you qualify for either, use them.

5. credit union and community lender programs

Some credit unions and community banks offer conventional loans with less than 20% down and no PMI. These programs often have income limits or geographic restrictions. They're worth researching, especially for first-time buyers. Check your local credit union's website or call and ask directly.

The real question: save 20% or buy now with PMI?

This is where most homebuyers get stuck. The conventional wisdom says save 20% to avoid PMI. But conventional wisdom doesn't account for what happens to home prices and rent while you're saving.

Let's compare two scenarios for a buyer looking at a $400,000 home in early 2026:

Scenario a: buy now with 10% down

• Down payment: $40,000
• Loan amount: $360,000 at 6.75%
• Monthly P&I: $2,335
• Monthly PMI: $250 (estimated for 720+ credit)
• Total monthly (P&I + PMI): $2,585

PMI drops after approximately 9 years through payments alone, or sooner if the home appreciates and you request cancellation. Let's assume 5 years with PMI based on moderate appreciation.

Total PMI paid over 5 years: $15,000

After 3 years, your loan balance is approximately $349,000. If the home appreciates 3% annually, it's worth $437,000. Your equity: $88,000.

Scenario b: wait 3 years, save 20%

You need an additional $40,000 (going from $40,000 to $80,000 saved). That's about $1,111/month in savings for 3 years.

But during those 3 years:

Home prices rise. At 3% annual appreciation, that $400,000 home costs $437,000 in 3 years. Your 20% down payment is now $87,400, not $80,000. You need to save $47,400, not $40,000.

You pay rent. If you're paying $1,800/month in rent, that's $64,800 over 3 years with zero equity to show for it.

You miss equity gains. The buyer in Scenario A has $88,000 in equity after 3 years. You have savings in a bank account.

The math side by side

The buy-now scenario costs $15,000 in PMI. The wait scenario costs $64,800 in rent that builds no equity, and you need $47,400 more for the down payment because prices rose. That's a $97,200 difference in favor of buying now, even accounting for the PMI.

When waiting actually wins

The math above assumes 3% annual appreciation. If home prices stay flat or decline, waiting works better. If you're in a market where prices have spiked 20%+ recently, a correction could mean the same home costs less in 3 years.

Waiting also wins if:

• Your credit score is below 680 and you can push it above 720 (better rate + lower PMI)
• You're in a high-cost market where 10% down still means a payment you can barely afford
• You have high-interest debt to pay off first (credit cards at 20%+ always beat mortgage improving your rate)
• Your income is unstable and the lower 20%-down payment gives needed budget room

The honest answer

For most buyers in stable or growing markets, buying with less than 20% down and paying PMI costs less than waiting. The rent you pay while saving is money gone. The appreciation you miss is equity lost. PMI is a known, finite cost. Rent and appreciation are ongoing.

But this only works if you can comfortably afford the payment with PMI included. Stretching to buy now and getting squeezed by the extra $250/month defeats the purpose.

Run the numbers for your specific situation. Use AmCalc's mortgage calculator to model both scenarios with your income, your target home price, and your local market conditions. Change the down payment between 10% and 20%, compare the payments, and factor in what you're paying in rent today. The math will tell you what the generic advice can't.