# What Is Mortgage Insurance (PMI)? How It Works and How to Avoid It By Opendoor Editorial Team | 2026-04-27 # What Is Mortgage Insurance (PMI)? How It Works and How to Avoid It Mortgage insurance protects the lender — not you — if you stop making payments. It's typically required when you put less than 20% down on a conventional loan. While it adds to your monthly payment, mortgage insurance also lets you buy a home sooner without saving up a large down payment. Here's exactly how it works, what it costs, and how to get rid of it. ## What Is Mortgage Insurance? Mortgage insurance is a policy paid by the borrower that protects the lender against financial loss if the borrower defaults on the loan. If you make a down payment of less than 20% on a conventional mortgage, your lender will almost certainly require you to carry mortgage insurance until you build enough equity in the home. Here's what trips up a lot of buyers: mortgage insurance does **not** protect you as the homeowner. It exists solely to reduce the lender's risk. If you stop making payments and the home goes into foreclosure, the insurance reimburses the lender for a portion of their losses — but it doesn't cover you or prevent foreclosure. It's also completely separate from **homeowners insurance**, which protects the physical home against damage from events like fire, storms, or theft. You'll need both if you put less than 20% down, but they serve very different purposes. **In short:** PMI stands for private mortgage insurance. It's a monthly cost added to your mortgage payment when your down payment is less than 20% of the home's purchase price. It protects the lender, not you, and it can be removed once you build sufficient equity. ## What Is PMI? (Private Mortgage Insurance) PMI — private mortgage insurance — is the specific type of mortgage insurance that applies to **conventional loans** (loans not backed by a government agency). When people ask "what is PMI," they're usually referring to this. Private insurance companies like MGIC, Radian, Genworth, Essent, and Arch provide PMI policies. Your lender selects the provider, but you pay the premium. It's typically added as a line item on your monthly mortgage payment, right alongside principal, interest, property taxes, and homeowners insurance. There's an important distinction to understand: PMI applies only to conventional loans. If you have an FHA loan, you'll pay something called MIP (mortgage insurance premium) instead. The concept is similar — you're paying extra to offset the lender's risk — but the rules, costs, and removal options are different. We'll break down MIP vs. PMI below. **Who pays for PMI?** The borrower, via a monthly premium added to the mortgage payment. **Who benefits from PMI?** The lender, by guaranteeing they recover losses if the borrower defaults. ## How Much Does PMI Cost? PMI typically costs between **0.1% and 2% of your loan amount per year**, though most buyers pay somewhere in the 0.5% to 1% range. The exact rate depends on your credit score, your loan-to-value ratio (LTV), and the type of loan you're taking out. Here's how much is mortgage insurance at common loan amounts: | Loan Amount | PMI Rate | Annual PMI | Monthly PMI | | --- | --- | --- | --- | | $300,000 | 0.5% | $1,500 | $125 | | $300,000 | 1.0% | $3,000 | $250 | | $400,000 | 0.5% | $2,000 | $167 | | $400,000 | 1.0% | $4,000 | $333 | | $500,000 | 0.5% | $2,500 | $208 | **How much is PMI on a $300,000 home?** If your down payment is less than 20%, you'd typically pay between $125 and $250 per month in PMI, depending on your credit score and LTV ratio. Several factors determine where your rate falls within that range: - **Credit score** — A higher credit score earns a lower PMI rate. Borrowers with scores above 760 often qualify for rates at the lower end of the spectrum. - **Loan-to-value ratio (LTV)** — The less you put down, the higher the LTV and the higher the PMI rate. A 5% down payment results in a higher PMI rate than a 15% down payment. - **Loan type** — Fixed-rate loans typically carry lower PMI rates than adjustable-rate mortgages. The good news: PMI is temporary on conventional loans. Unlike some costs that stick around for 30 years, you can remove it once you've built enough equity. ## FHA Mortgage Insurance vs. PMI (MIP vs. PMI) If you're comparing [types of mortgage loans](/articles/types-of-mortgage-loans), you'll notice that FHA loans have their own version of mortgage insurance called **MIP (mortgage insurance premium)**. While PMI and MIP serve the same basic purpose — protecting the lender — the rules are significantly different. | | PMI (Conventional) | MIP (FHA) | | --- | --- | --- | | When required | Less than 20% down | Always required | | Can be removed? | Yes — at 20% equity | Usually no (if less than 10% down) | | Upfront cost | Usually none | 1.75% of loan amount | | Monthly cost | 0.1%–2% of loan per year | 0.45%–1.05% of loan per year | The biggest difference is removal. With a conventional loan, private mortgage insurance drops off once you reach 20% equity. With an FHA loan originated after June 2013 where the borrower put less than 10% down, MIP stays for the **life of the loan**. That means the only way to stop paying it is to refinance into a conventional loan. FHA loans also charge an **upfront mortgage insurance premium** of 1.75% of the loan amount, which is typically rolled into the loan balance. On a $400,000 loan, that's $7,000 added to what you owe from day one. For buyers with strong credit scores who qualify for conventional financing, a conventional loan with PMI is often cheaper over the long term than an FHA loan with MIP — even if the monthly MIP rate looks lower on paper. The ability to remove PMI is a significant advantage. ## How to Avoid PMI If you'd rather not pay PMI at all, you have a few strategies: - **Put 20% down.** This is the most straightforward way to avoid private mortgage insurance entirely. With 20% equity from day one, the lender doesn't require the added protection. On a $400,000 home, that means an $80,000 down payment. - **Use a piggyback loan (80/10/10).** This structure combines a first mortgage for 80% of the home's value, a second loan (often a home equity line of credit) for 10%, and a 10% down payment. Because the first mortgage is at 80% LTV, no PMI is required. The trade-off is that the second loan typically carries a higher interest rate. - **Choose lender-paid PMI (LPMI).** Some lenders will cover the PMI cost in exchange for charging you a slightly higher interest rate. This can make sense if you plan to sell or refinance within a few years, since the higher rate may cost less in the short run than monthly PMI payments. - **Get a VA loan.** If you're an eligible veteran or active-duty service member, VA loans never require mortgage insurance — regardless of your down payment. This is one of the most valuable benefits of the VA loan program. **An honest note:** Avoiding PMI often involves trade-offs. Putting 20% down is the cleanest solution, but it may mean waiting months or years longer to buy — and during that time, home prices may continue to rise. For many buyers, paying PMI and getting into a home sooner is the smarter financial move. ## How to Remove PMI From Your Loan One of the biggest advantages of PMI on a conventional loan is that it's not permanent. There are several ways to remove it: - **Automatic cancellation at 78% LTV.** Under the **Homeowners Protection Act of 1998**, your lender is legally required to cancel PMI when your loan balance reaches 78% of the home's original purchase price — as long as you're current on payments. This happens automatically; you don't need to request it. - **Request cancellation at 80% LTV.** You don't have to wait for the automatic trigger. Once your loan balance drops to 80% of the original value, you can contact your lender and request PMI removal. You'll generally need a good payment history with no late payments in the past 12 months. - **Refinance based on increased home value.** If your home has appreciated significantly, a refinance with a new appraisal can demonstrate that you now have 20% or more equity — even if you haven't paid the balance down that far. This triggers PMI removal on the new loan. To calculate your current LTV, divide your remaining loan balance by the home's current appraised value. For example, if you owe $320,000 on a home worth $400,000, your LTV is 80% — which means you're eligible to request removal. **FHA exception:** If you have an FHA loan originated after June 2013 with less than 10% down, MIP cannot be removed. Your only option is to [refinance into a conventional loan](/articles/how-to-get-a-mortgage) once you've built 20% equity. ## Is It Better to Pay PMI or Put 20% Down? This is one of the most common questions buyers wrestle with, and the answer depends on your specific financial situation. **The case for paying PMI:** Buying now — even with PMI — means you start building equity immediately. If home prices appreciate 3% to 5% per year in your market, waiting two more years to save a full 20% down payment could cost you tens of thousands of dollars in higher purchase prices. At $250 per month in PMI, you'd pay $6,000 over two years. If the home you want appreciates by $20,000 in that same period, the math favors buying sooner. **The case for putting 20% down:** You eliminate PMI from day one, which lowers your monthly payment by $125 to $333 or more. You also start with more equity, which means a smaller loan balance and less total interest paid over the life of the loan. **The break-even question:** Consider how long you'll actually pay PMI. If you're putting 15% down and your PMI will drop off in a few years, the total cost might be quite manageable. If you're putting 5% down, you could be paying PMI for a decade or more. The best way to compare both scenarios is to run the actual numbers for your situation. [How much mortgage can you afford?](/articles/how-much-mortgage-can-i-afford) That depends on seeing the full monthly picture — including PMI. ## Calculating Your Mortgage Payment with PMI PMI is one of several costs that make up your total monthly mortgage payment, and it's important to factor it into your affordability calculations before you start shopping. For example, say you're buying a $400,000 home with 10% down ($40,000). Your loan amount is $360,000. At a 6.5% interest rate on a 30-year fixed mortgage, your principal and interest payment would be about $2,275. Add estimated PMI at 0.7% ($210 per month), property taxes, and homeowners insurance, and your total monthly payment could be $2,900 or more. That $210 per month in PMI is real money — but it's also what makes the purchase possible without waiting years to save an additional $40,000 in down payment. Use the [Opendoor Mortgage Calculator](https://www.opendoor.com/mortgage-calculator) to estimate your all-in monthly payment, including estimated PMI, taxes, and insurance. Knowing your number before you start house hunting makes the entire mortgage conversation easier — and helps you set a realistic budget. [Calculate My Payment Including PMI →](https://www.opendoor.com/mortgage-calculator) **Frequently asked questions** ## Disclosure Opendoor Home Loans LLC is not available in all markets. Products, programs, rates, and terms are subject to change without notice. This material is provided for informational purposes only and is not an offer or guarantee of credit. Contact Opendoor Home Loans for current availability. --- *Originally published at [https://www.opendoor.com/articles/what-is-mortgage-insurance-pmi](https://www.opendoor.com/articles/what-is-mortgage-insurance-pmi)*