PMI: What is it? Do I Need it?

How to Determine Which Type of PMI is Best For You

In today's market, saving for a 20% down payment can mean putting your home buying dreams on hold. Fortunately, there's an option for buyers to put down less than 20% by utilizing private mortgage insurance, also known as PMI.

What is Private Mortgage Insurance?

Private Mortgage Insurance, or PMI, is an added insurance policy that lowers a lender's risk when lending to buyers that aren't putting down 20% on their home purchase. Why is the 20% so important? One of the factors taken into consideration when applying for a mortgage is the loan-to-value or LTV ratio. We've covered LTV in-depth on our blog, but put simply it measures the market value of your new home against the amount of the loan and helps lenders calculate the risk they're taking when offering you a loan. A higher upfront investment from a borrower is less risky for a lender, but PMI can help offset the risk for situations in which borrowers aren't putting 20% down.

There are four types of private mortgage insurance available to borrowers:

Borrower-Paid Mortgage Insurance (BPMI)

This is the most common type of PMI, and shows up in the form of an additional fee that's added to your monthly mortgage payment. You continue to pay BPMI regularly until you've accumulated 22% equity in your home, which occurs through regular mortgage payments, appreciation of your home's value, or in most cases a combination of both. This means that PMI isn't forever! Once you build enough equity, it's removed and your monthly payment goes down.

While PMI can be a great option for buyers that aren't prepared with a 20% down payment, keep in mind that it can take several years to pay off PMI. That means the extra monthly expense will likely be with you for some time. You can consider options for refinancing down the road to get rid of PMI if that makes sense financially.

Single-Premium Mortgage Insurance (SPMI)

Also known as single-payment mortgage insurance, with this option you pay your entire PMI sum up front, rather than monthly with your mortgage payment. The benefit here is a lower monthly payment, which can equate to qualifying for a higher loan amount to put toward your home purchase.

This option is the best fit for buyers who are planning to stay in their home for a long time. The single payment isn't refundable, so if you decide to refinance or sell your home within a few years, you won't recoup anything you've paid in SPMI.

Lender-Paid Mortgage Insurance (LPMI)

With this option, your lender is paying for your PMI in exchange for a higher interest rate on your loan. This is another instance in which you could still have a lower monthly payment than with BMPI and therefore qualify to borrow more. The downside is that this higher interest rate is built into your loan, so you won't reach a point where you stop paying it unless you refinance.

Split-Premium Mortgage Insurance

While this option may be the least common, it can be a good middle ground for some buyers. In this instance, a borrower splits their PMI cost between a lump sum at their closing and a lower monthly payment to cover the remaining amount. This works well because it's a lower upfront cost as well as a lower monthly payment, which might be needed to qualify for the mortgage in the first place, particularly in cases where the borrower has a high debt-to-income ratio.

How much does PMI cost, and how is it calculated?

The cost of PMI varies based on several factors, including your credit score, down payment amount, loan type, and the specific PMI program used by your lender. In general, PMI typically ranges from about 0.3% to 1.5% of the original loan amount per year, which is then divided into monthly payments if you choose borrower-paid PMI. Buyers with stronger credit profiles and slightly higher down payments often qualify for lower PMI rates, which can make a meaningful difference in monthly affordability.

When and how can PMI be removed?

One important thing to understand is that PMI is not permanent. For conventional loans with borrower-paid PMI, it is automatically removed once your loan balance reaches 78% loan-to-value based on the original purchase price, as long as you are current on your payments. In many cases, you can also request PMI removal earlier, typically once you reach 80% loan-to-value, especially if your home has appreciated in value. This may involve an appraisal, but it can be a smart move if market conditions work in your favor. Understanding when and how PMI can be removed helps buyers view it as a temporary tool rather than a long-term burden.

If you're buying your first home and saving 20% feels out of reach, you're not alone. PMI is one of the most common tools first-time buyers use to purchase sooner while building equity over time. You can learn more about the full homebuying process in our First-Time Homebuyer Resource Hub.

Because PMI is just one piece of how a mortgage is structured, it's also helpful to understand how it fits alongside different loan programs and payment strategies. Our Mortgage Options Hub breaks down the various paths available so you can compare what works best for your goals.

When you're ready, a knowledgeable lender can help you evaluate PMI options and determine what makes sense for your situation. Acadia Lending Group is here to guide you through the process and answer questions every step of the way.

Watch this super quick video for a simple, easy-to-understand overview.