Buying a home can feel overwhelming, especially when you think about saving up for a down payment. Although 20% down is considered the standard, it’s actually pretty common to have less; in 2022, 60% of new residential mortgages had down payments under 20%.

And that’s where Private Mortgage Insurance (or PMI) comes in.

What exactly is PMI and who needs it?

Private mortgage insurance, often called PMI, is a type of insurance used with conventional mortgage loans to allow you to purchase a home with less than a 20% down payment.

Without a 20% down payment on your loan, you’ll need to purchase PMI to protect the loan, just in case you are not able to pay the mortgage. Your PMI payment is lumped in with your total monthly mortgage payment, which also includes your principal and interest, property taxes, and homeowner’s insurance.

The good news? It can help you qualify for a loan that you might not be able to get otherwise. PMI allows first-time homebuyers to make a down payment with as little as 3% on conventional loans – and that moves to 5% if you aren’t first-time homebuyers.

Types of PMI

There are four main ways to structure PMI, and each suits different needs:

1. Borrower-Paid Mortgage Insurance (BPMI):The most common type, where PMI is added to your monthly mortgage bill.
2. Lender-Paid Mortgage Insurance (LPMI):You get a higher interest rate instead of paying PMI directly, which can help lower your debt-to-income ratio for loan approval.
3. Single-Premium Mortgage Insurance: You pay all PMI costs upfront in one lump sum, which lowers your monthly payment—a good option if you have cash on hand and want to save over time.
4. Split-Premium Mortgage Insurance: You pay part of the PMI upfront and the rest monthly, reducing your monthly cost without paying it all at once.

How much is PMI?

The cost of PMI you pay depends on several things:

• The size of your loan and your loan-to-value (LTV) ratio
• The amount of your down payment
• Your credit score

According to the Urban Institute, the average monthly cost of PMI is between 0.46%-1.5% of the loan amount.

(Do keep in mind that PMI payments don’t go towards the payments of your mortgage. These

payments are separate from paying off your mortgage loan.)

When Can I Stop Paying PMI? 

PMI payments are not forever!

Once your mortgage balance drops to 78 percent of your home’s original value, the PMI will automatically drop off your loan. Or if you pay down your mortgage balance to 80%, the Homeowners Protection Act lets you request to cancel the coverage.

Also, if you’ve purchased a fixer upper and are able to provide proof of all the work done (like finishing a basement or adding a room), we can remove PMI if an appraisal shows the home’s value has increased and you now meet the threshold required.

At INB, it just takes an email or phone call, and we can check on different options of removing your PMI. Even after closing your loan, I’m always available to talk through your personal situation.