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Deborah Kearns is a mortgage analyst/reporter and has 15+ years of experience as an award-winning journalist and communicator.
Updated May 21, 2023 Reviewed by Reviewed by Katie MillerKatie Miller is a consumer financial services expert. She worked for almost two decades as an executive, leading multi-billion dollar mortgage, credit card, and savings portfolios with operations worldwide and a unique focus on the consumer. Her mortgage expertise was honed post-2008 crisis as she implemented the significant changes resulting from Dodd-Frank required regulations.
Lenders offer numerous loan programs with lower down payment requirements to fit a variety of budgets and buyer needs. If you put down less than 20% of a home's purchase price, though, expect to pay for private mortgage insurance (PMI).
PMI is an added expense that can increase the cost of your monthly mortgage payments, making your loan more expensive. However, PMI is generally unavoidable unless you have a down payment of 20% or more.
PMI is a type of mortgage insurance that buyers are typically required to pay for a conventional loan when they make a down payment that is less than 20% of the home’s purchase price.
Many lenders offer low down payment programs, allowing you to put down smaller amounts such as 3%. In return, the you must buy PMI, which protects the lender’s investment in case you fail to repay your mortgage, known as default. In other words, PMI insures the lender, not you.
PMI helps lenders recoup more of their money incase of a default. The reason lenders require the coverage for down payments below 20% of the purchase price is because you own a smaller stake in your home. Mortgagers are lending you more money up front and, so they stand to lose more if you default in the initial years of ownership.
Loans insured by the Federal Housing Administration, or FHA loans, also require mortgage insurance, but the guidelines are different than those for conventional loans.
Upfront fees on Fannie Mae and Freddie Mac home loans changed in May 2023. Fees were increased for homebuyers with higher credit scores, such as 740 or higher, while they were decreased for homebuyers with lower credit scores, such as those below 640. Another change: Your down payment will influence what your fee is. The higher your down payment, the lower your fees, though it will still depend on your credit score. Fannie Mae provides the Loan-Level Price Adjustments on its website.
In general, you’ll pay between $30 and $70 per month for every $100,000 borrowed, according to Freddie Mac, a government-sponsored enterprise that buys and sells mortgages on the secondary mortgage market.
The amount can vary based on your credit score and your loan-to-value ratio—the amount you borrowed on your mortgage compared to the home’s value.
Be aware of mortgage servicers including a private mortgage insurance premium when one is not required. The Consumer Financial Protection Bureau (CFPB) found that these types of junk fees can occur.
You have two options to pay for PMI: a one-time, up-front premium paid at closing or monthly. In many cases, lenders roll PMI into your monthly mortgage payment as a monthly premium. When you receive your loan estimate and closing disclosure documents, your PMI amount will be itemized in the Projected Payments section on the first page of each document.
Another option is to pay for PMI as one of your closing costs. On the loan estimate and closing disclosure forms, you’ll find this premium on page 2, section B. The drawback of this option, though, is you likely won’t be refunded this amount if you move or refinance your mortgage. In some cases, you may pay both up-front and monthly premiums.
In years past, you were allowed to deduct the cost of PMI from your federal taxes, but you may no longer deduct this expense.
With many loans, you won’t pay PMI for the entire duration of the loan. The federal Homeowners Protection Act eliminates PMI for many mortgages in certain circumstances in one of three ways:
You can request PMI cancellation once your loan-to-value ratio—the amount of your loan balance divided by the home’s market value—falls below 80% of the home’s original appraised value (or sooner, if your home’s value appreciates before then). Lenders list this scheduled date on the PMI disclosure form, which you likely received as part of your closing documents.
To cancel PMI, you’ll need to:
With some loans, you cannot cancel PMI. These include FHA loans made after June 3, 2013. To remove PMI, you will need to fully pay off the loan or refinance it into another loan with more than 20% down.
Another way to end PMI is known as automatic PMI termination, which kicks in on the expected date that your remaining mortgage balance hits 78% LTV. By law, lenders are required to cancel PMI on certain mortgages automatically by this date.
The same conditions for borrower-initiated PMI cancellation (on-time payment history and no liens) also apply here. If you’ve had late payments, your lender will not cancel PMI until your payments become current.
The final PMI termination is when a lender must automatically end PMI the month after your loan term hits its midpoint on a repayment schedule—even if you haven’t reached 78% LTV.
For example, if you have a 30-year fixed loan, the midpoint would be after the 15-year mark. Again, you must be current on your payments to qualify. This type of PMI cancellation usually applies to loans with special features, such as balloon payments, an interest-only period, or principal forbearance.
Your eligibility to cancel PMI is also influenced by whether your home’s value has appreciated or depreciated over time. If it increases, you can cancel PMI sooner than expected; if it decreases, you will wait longer than expected to cancel PMI.
Before canceling PMI, a lender will determine your home’s current market value by a Broker Price Opinion (performed by a real estate agent who values your home based on the value of comparable homes in your neighborhood), a certification of value, or another type of property appraisal.
If your home’s value has fallen due to a market downturn, your lender will likely deny your PMI cancellation request unless your home’s value is based on a new appraisal and you pay down the remaining loan balance to the 80% LTV of the new appraised value.
On the other hand, your home’s value might increase faster than anticipated, either due to market conditions or because you’ve remodeled it, meaning you might reach the 80% LTV threshold early. In that case, you can request PMI cancellation ahead of time, and your lender will order an appraisal to confirm the home’s current value.
You’re responsible for paying for the property appraisal, which can cost anywhere from $300 to $400. This amount may vary depending on the home’s size and location.
Some lenders offer their own conventional loan products without required PMI; however, they tend to charge higher interest rates to protect themselves if you default on your loan.
In the long run, paying more in interest can potentially be more expensive than paying PMI, depending on how long you stay in your home or how long you keep the same mortgage.
Comparison shopping for a mortgage can help. Look at the interest rates offered for non-PMI loans versus those with PMI. Calculate the difference between the two to see how much more you’ll pay for a loan without PMI. Is that amount less than PMI payments you’ll make until you reach the 80% LTV ratio for cancellation?
Remember, home values could rise or fall, affecting the length of time you might pay PMI. A mortgage calculator can show you the impact of different rates on your monthly payment.
Putting down 20% of a home’s purchase price eliminates the need for PMI, which is ideal if you can afford it. In addition to saving regularly for a down payment, consider buying a less expensive home.
A more conservative house-hunting budget will lower the amount needed to make a 20% down payment.
Some lenders recommend using a second “piggyback” mortgage to avoid PMI.
This can help lower initial mortgage costs rather than paying for PMI. It works like this: You take out a first mortgage for most of the home’s purchase price (minus your down payment amount). Then you take out a second, much smaller mortgage for the remainder of the home’s purchase price, less the first mortgage and down payment amounts.
As a result, you avoid PMI and have combined payments less than the cost of the first mortgage with PMI.
However, a second mortgage generally carries a higher interest rate than a first mortgage. The only way to get rid of a second mortgage is to pay off the loan entirely or refinance it (along with the first mortgage) into a new standalone mortgage, presumably when the LTV reaches 80% (to avoid PMI).
Piggyback mortgages can be costly, particularly if interest rates increase from the time you take out the initial loan and when you’d refinance both loans into one mortgage. Don’t forget you’ll have to pay closing costs again to refinance both loans into one loan.
If you can’t qualify for a conventional loan product, you might consider an FHA loan. Like some conventional loan products, FHA loans have a low-down payment option—as little as 3.5% down—and more relaxed credit requirements.
Lenders require mortgage insurance for all FHA loans, which are paid in two parts: an up-front mortgage insurance premium, or UFMIP, and an annual mortgage insurance premium, or annual MIP. Both costs are listed on the first page of your loan estimate and closing disclosure.
The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount. You can pay it up-front at closing or it can be rolled into your mortgage. If you opt to include UFMIP in your mortgage, your monthly payments will be higher and your total loan costs will go up.
In addition to the UFMIP, you’ll pay an annual MIP, which is divided into equal monthly installments and rolled into your mortgage payments. Depending on your loan term and size, you’ll pay 0.45% to 1.05% of the loan amount.
If you put 10% or more down, annual MIP can be canceled after the first 11 years of your loan. However, unlike conventional loans, FHA loans with a down payment below 10% require you to pay annual MIP for the life of the loan.
If you fall into the latter camp, the only way to eliminate MIP payments is to refinance into a conventional loan, once your LTV ratio is low enough to qualify for a conventional mortgage without PMI.
Private mortgage insurance (PMI) protects the lender in case you default on your mortgage. When you have a down payment of less than 20% of the home price, you will likely be required to pay PMI.
You typically need to pay PMI until you have built up 20% equity in your home. PMI should end automatically when you have 22% equity in your home. In some cases, you can stop paying PMI at the midpoint of the mortgage, regardless of the equity amount. Some mortgages, such as FHA loans, have permanent PMI which you can only remove by refinancing or paying in full.
It is typically better to put 20% down if you have the funds to make that amount of down payment. By avoiding PMI with a larger down payment, you can save more money in the long-term, including on PMI premiums and interest expenses.
These days, most homebuyers are making down payments below 20%. In 2021, the median down payment on a home was 17% for repeat buyers and 7% for first-time buyers, according to a survey by the National Association of Realtors.
As you apply for mortgages, look carefully at loan estimates to compare how much you’ll pay for a loan with PMI. A loan that might not require PMI could come with a higher interest rate. With few exceptions, PMI is difficult to avoid if you need a loan with a low down payment.
Article Sources
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An offset mortgage allows money in savings accounts held at the same financial institution as the mortgage to offset the mortgage balance.
A purchase-money mortgage is a mortgage issued to the borrower by the seller of the home as part of the purchase transaction.
A reverse mortgage initial principal limit is the amount of money a reverse mortgage borrower can receive from the loan.
Up-front mortgage insurance (UFMI) is a type of mortgage insurance policy made at the time of the loan. It is required on certain FHA loans.
An interest-only adjustable-rate mortgage (ARM) is an adjustable-rate mortgage in which the borrower delays paying down any principal for a period of time.
A principal reduction is a decrease in the principal owed on a loan, typically a mortgage, as an alternative to foreclosure on the home.
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