What Is Private Mortgage Insurance?

Private mortgage insurance, often abbreviated as PMI, is a type of insurance that may be required on certain conventional mortgage loans. It is commonly required when the borrower’s down payment is below a specific threshold. This guide explains what PMI is, who it protects, how it affects your monthly cost, and how it differs by loan program.

What PMI is

According to the Consumer Financial Protection Bureau, private mortgage insurance is a type of insurance that protects the lender if the borrower stops making payments on the loan. PMI is typically required for conventional loans when the down payment is less than 20 percent of the purchase price. It is important to understand that PMI protects the lender, not the borrower.

When PMI typically applies

For many conventional loans, PMI may apply when the down payment is less than 20 percent of the purchase price. The specific threshold and requirements can vary by loan program and lender. Some loan programs may have different insurance structures or requirements. The 20 percent threshold is a common reference point for conventional loans, but it is not a universal rule that applies to every loan or every lender.

The relationship between the down payment amount and mortgage insurance is explained in more detail in our guide on down payments.

How PMI affects your monthly cost

PMI adds to the monthly housing cost. The cost of PMI can vary based on factors such as the loan amount, the loan-to-value ratio, the loan program, the borrower’s credit profile, and other factors. Some borrowers pay PMI as a monthly premium included in the mortgage payment, while others may have options for a single upfront premium or a combination. The specific structure depends on the lender and the loan program.

For a broader look at how PMI fits into the total monthly housing cost, see our guide on monthly homeownership costs.

PMI is not the same as all mortgage insurance

PMI specifically refers to private mortgage insurance on conventional loans. Government-backed loan programs have their own insurance structures. For example, FHA loans have a different insurance structure with upfront and annual premiums. VA loans have a different funding fee structure. Each loan program has its own rules, and the insurance requirements, costs, and cancellation policies can differ significantly. This guide focuses on PMI for conventional loans and does not cover every government-backed program in detail.

How PMI may be cancelled

For many conventional loans, PMI may be cancelled when the loan balance reaches a certain percentage of the original home value, provided certain conditions are met. The specific requirements for cancellation can vary by loan program, lender, and applicable law. Some borrowers request cancellation when they believe they have reached the required threshold, while others may have PMI automatically cancelled at a specific point based on the loan terms. The rules for cancellation depend on the specific loan program and the lender’s requirements.

A hypothetical illustration

Consider a hypothetical borrower who purchases a home for $300,000 with a 10 percent down payment of $30,000. The loan amount would be $270,000. Because the down payment is below 20 percent, PMI may be required on the conventional loan. The PMI premium adds to the monthly housing cost, along with principal, interest, property taxes, and homeowners insurance. This hypothetical example is intended to explain the concept and is not an affordability, qualification, or lending determination. Actual requirements and costs vary by lender, loan program, and borrower circumstances.

PMI and overall affordability

PMI is one of several factors that affect the monthly cost of owning a home. When considering affordability, it may be useful to account for PMI alongside principal, interest, property taxes, insurance, HOA dues, and other potential costs. For a broader look at how all these factors fit together, see our guide on how much house you can afford.

Actual mortgage insurance requirements are determined by lenders

Final mortgage insurance requirements and loan terms are determined by lenders using their own underwriting standards and the requirements of the loan programs they offer. Loan programs, interest rates, underwriting standards, and eligibility criteria can vary by lender and can change over time. Keynomic does not determine whether mortgage insurance will be required, what the premium will be, or when it may be cancelled.