Private Mortgage Insurance (PMI): What It Is and How to Avoid It

If you're buying a home with less than 20 percent down, you'll probably hear the term private mortgage insurance (PMI) sooner or later. It shows up as a line on your Loan Estimate and as part of your monthly payment, and plenty of buyers don't know what it is or that it can go away. Here is what PMI is, who it protects, when it ends, and how to avoid it.

Private mortgage insurance is insurance you may be required to buy when you take out a conventional loan with a down payment of less than 20 percent. The Consumer Financial Protection Bureau (CFPB) is clear on one point that surprises people: PMI protects the lender, not you. If you fall behind, the insurance pays the lender, but you can still face foreclosure.

So why pay for it? Because it lets a lender say yes to a smaller down payment. The lender takes more risk when you have less equity, and PMI offsets that risk. For many Texas buyers, paying PMI for a few years is a fair trade for buying sooner instead of saving for a full 20 percent.

What does PMI stand for, and who does it protect?

PMI stands for private mortgage insurance. It protects the lender, not you. If you stop paying, the insurance pays the lender, but you can still lose the home to foreclosure.

When can I remove PMI from my loan?

For borrower-paid PMI under the Homeowners Protection Act, you can ask in writing to cancel when your balance is scheduled to reach 80 percent of the original value, if you have a good payment history, no junior liens and your value has not dropped. It must end automatically at 78 percent if you are current on your payments, and at the midpoint of the loan term.

Do I have to put 20 percent down to avoid PMI?

Twenty percent down is the simplest way to avoid PMI on a conventional loan, but it is not the only one. A VA loan has no monthly mortgage insurance for eligible borrowers, and a piggyback structure or lender-paid PMI are other options with their own trade-offs.

Is lender-paid PMI better than borrower-paid PMI?

It depends on how long you plan to keep the loan. Lender-paid PMI is usually paid through a higher interest rate, and the CFPB says different removal rules apply. Borrower-paid PMI has federal removal rules. Ask for both options priced in writing.

Do FHA and VA loans have PMI?

FHA loans do not have PMI, but they carry their own mortgage insurance premium, with an upfront cost and an annual cost paid monthly. HUD's March 2023 schedule ties the annual premium's length to loan-to-value. VA loans have no monthly mortgage insurance, though most borrowers pay a one-time funding fee.