PMI Explained: What Less Than 20% Down Actually Costs You

Private mortgage insurance is the single most resented line on a mortgage statement, and most of the resentment comes from a misunderstanding: people think it protects them. It does not. It protects the lender if you default. You pay for it, and you get nothing back.

What you do get is the ability to buy a house now instead of in four years. Whether that is a good trade is the actual question, and it has a real answer.

What it costs

Freddie Mac puts the typical range at roughly $30 to $70 per month for every $100,000 borrowed. On a $475,000 loan that is somewhere around $140 to $330 a month.

The spread inside that range is not random. Two things move it:

• How much you put down. 5% down is priced very differently from 15% down. Every step up the down-payment ladder cuts the premium.
• Your credit score. This one is brutal in a way people underestimate. The gap between a 760 and a 640 on the same loan can be several times the premium, not a few dollars.

The published rate cards from the mortgage insurers span from roughly a fifth of a percent of the loan per year at the best combinations to well over three percent at the worst. And several of the big insurers no longer publish a public grid at all, pricing instead through their own risk engines. That means there is no lookup table your loan officer can consult. Your rate is quoted for your file.

The practical takeaway: if your score is close to a threshold, thirty days of work on your credit before you apply can be worth more than months of extra saving. That is worth a conversation with your lender before you shop, and it is why I point people at the credit score tool early.

When it comes off, precisely

This is where I see the most confusion, because there are two different thresholds and people mix them up.

80% is the request threshold

Once your loan balance reaches 80% of the original value, you can ask the servicer to cancel. You have to ask, in writing, and you have to meet conditions: a good payment history, no second lien, and often an appraisal at your expense proving the value has held.

78% is the automatic one

At 78% of the original value, based on the original amortisation schedule, the servicer must terminate the coverage on its own. You do not ask. It just stops, provided you are current on payments.

There is also a midpoint rule: if you somehow have not hit 78% by the halfway mark of the loan term, it terminates then anyway.

Note the phrase “original value” in both. Automatic termination runs off the schedule, not off what your house is worth today. If your home appreciates fast, that appreciation does not automatically shorten the clock. You have to request cancellation and support it with an appraisal.

FHA is a different animal

FHA loans do not carry PMI. They carry a mortgage insurance premium, and the rules are not the same.

There is an upfront premium financed into the loan, and an annual premium collected monthly. HUD cut the annual premium by thirty basis points in 2023, and the commonly quoted rate today is 0.55%.

The rule that matters most: FHA mortgage insurance only falls off after eleven years if your loan-to-value at origination was 90% or lower. Above 90%, which is where most FHA buyers land, it runs for the full term of the loan. The only exit is refinancing out of FHA entirely.

That does not make FHA a bad choice. For a buyer with a thin credit file it is often the only path to a reasonable rate. It does mean the comparison against a conventional loan has to run over the whole holding period, not just the first year.

And if you are eligible for a VA loan, none of this applies to you. No monthly mortgage insurance at all, at any down payment. That advantage is large enough that I gave it its own guide.

The waiting math

Here is the argument I have most often. Someone wants to wait until they have 20% saved so they never pay PMI.

Run the four numbers before you decide. First, what you would pay in PMI over the years you would actually carry it, which for most buyers is three to six years, not thirty. Second, what rent costs over the same period you spend saving. Third, what the house is likely to cost when you get there. Fourth, the principal you would have paid down in the meantime.

With the metro median where it is, going from 5% down to 20% down on a typical purchase means saving another sixty to eighty thousand dollars. At a realistic savings rate that is years. PMI over that same period is usually a fraction of what you would spend on rent, and the house price is not standing still while you save.

I am not saying waiting is always wrong. If your income is unstable, or you have high-interest debt, or you might move for work inside three years, waiting is the right call and I will tell you so. But “I refuse to pay PMI” is a rule of thumb, not an analysis, and the analysis usually goes the other way.

Ways to reduce or skip it

• Put down more, even a little. Moving from 5% to 10% often cuts the premium meaningfully.
• Fix your credit first. The largest single lever for most buyers.
• Lender-paid mortgage insurance. The cost is baked into a higher interest rate instead of a separate line. No cancellation, ever, because there is nothing to cancel. Sometimes cheaper over a short hold, worse over a long one.
• Single-premium. Paid once at closing, occasionally covered by a builder closing-cost credit, which is a use of incentive dollars most buyers never think to ask for.
• VA, if you qualify. Always the answer when it is available.

What to do with this

Ask your lender for the actual PMI quote on your file, not a range. Ask what it would be at the next down payment tier and at a higher credit score. Then ask what the payment looks like without it, so you know what you are working toward.

Most buyers I work with carry PMI for a few years and stop thinking about it once it drops off. It is a cost of entry, not a life sentence, as long as you know which threshold does what and you actually make the request at 80% instead of waiting for 78%.

If you want to see how the numbers shake out on a specific price point, the payment calculator is a decent starting point, and I am happy to run the real version with you.