What is PMI (private mortgage insurance)?
PMI is insurance that conventional lenders require when your down payment is less than 20% of the home's price. It protects the lender, not you, if you default. PMI is added to your monthly mortgage payment and typically costs between 0.3% and 1.5% of the loan amount per year, depending on your credit and down payment.
PMI usually runs 0.3% to 1.5% of the original loan amount annually. On a $300,000 loan at 0.6%, that is $1,800 per year or $150 per month. Your exact rate depends on your credit score, loan-to-value ratio, and loan type. A larger down payment and higher credit score reduce the rate.
Under the federal Homeowners Protection Act, you can request PMI cancellation once your loan balance reaches 80% of the original value, and the lender must automatically terminate it at 78% LTV if you are current on payments. You can reach these thresholds faster by paying down principal or through home appreciation with a new appraisal.
How is PMI different from FHA mortgage insurance?
PMI applies to conventional loans and can be cancelled at 78-80% LTV. FHA loans instead charge a mortgage insurance premium (MIP) that, for most loans made after 2013, lasts the life of the loan unless you put 10% down or refinance out of FHA. This makes conventional-with-PMI cheaper long term for many buyers.