What Is PMI and When It Applies (A Guide to Private Mortgage Insurance)

If you are planning to buy a home with a down payment of less than 20%, you will likely encounter something called PMI. What is PMI and when it applies is a common concern for first-time buyers because it adds an extra monthly fee to your bill. PMI stands for Private Mortgage Insurance, and it is a type of insurance that protects the lender—not you—in case you are unable to make your payments.

In this guide, we will break down why PMI exists, how much it typically costs in 2026, and most importantly, how you can get rid of it. Understanding this fee is a major part of learning how mortgage payments are calculated accurately for your budget.

Why Lenders Require PMI

Lenders view homebuyers who put down less than 20% as “higher risk.” If the housing market dips and you owe more than the home is worth, the bank could lose money if they have to foreclose. PMI acts as a safety net for the bank, allowing them to offer you a loan even if you don’t have a massive amount of cash saved up for a down payment.

While PMI feels like an “extra” cost, it is actually the tool that allows many people to enter the housing market sooner. Without it, you might have to wait years longer to save up a full 20% down payment.

Quick Tip: PMI only applies to “Conventional” loans. If you have an FHA loan, you will pay something similar called an MIP (Mortgage Insurance Premium), which often lasts for the life of the loan.

Takeaway: PMI isn’t for your protection; it’s a fee you pay to give the bank peace of mind while you build equity.

How Much Does PMI Cost?

The cost of PMI isn’t a flat rate. It is calculated as a percentage of your total loan amount. Typically, PMI costs between 0.5% and 1.5% of your loan amount per year. The exact percentage depends on your credit score and how much money you put down.

Let’s look at how this impacts a $300,000 mortgage:

Estimated PMI Rate	Annual PMI Cost	Monthly PMI Fee
0.5% (Great Credit)	$1,500	$125
1.0% (Average Credit)	$3,000	$250
1.5% (Lower Credit)	$4,500	$375

This fee is simply added to your monthly PITI (Principal, Interest, Taxes, and Insurance) bill. To see how a PMI fee might change your total cost, try adding different amounts to our Home Page Calculator.

Takeaway: Having a higher credit score doesn’t just lower your interest rate; it also lowers your monthly PMI costs.

When Does PMI Go Away?

The best thing about PMI is that it isn’t permanent. Once you have enough Equity in your home (meaning you own at least 20% of it), you can stop paying for it. This is a great time to review how amortization works, as your schedule will show you exactly when you hit that 20% mark.

There are three ways to cancel PMI:

• Automatic Cancellation: By law, your lender must cancel PMI when your loan balance reaches 78% of the original value of the home.
• Request Cancellation: You can ask your lender to drop PMI once you hit 80% equity. You usually need a good payment history to do this.
• New Appraisal: If your home’s value has increased significantly in 2026 due to the market, you can pay for a new appraisal. If the new value shows you have 20% equity, the PMI can be removed early.

Learning how extra payments reduce interest is also a great way to speed up this process, as every dollar extra brings you closer to that 20% equity goal.

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