What is private mortgage insurance (PMI)

Private mortgage insurance (PMI) is a type of insurance that may be required by your mortgage lender if your down payment is less than 20 percent of your home’s purchase price. PMI protects the lender against losses if you default on your mortgage.

Who’s required to have PMI

Homebuyers who get a conventional loan and put down less than 20 percent of the home’s purchase price are usually required to pay PMI. Ask your lender if the loan you are considering requires private mortgage insurance or a mortgage insurance premium (MIP).

How much PMI costs

The cost of PMI depends on your credit score and down payment, but generally it ranges from 0.3 percent to 1.5 percent of the original loan amount each year. That’s an extra cost, on top of the interest you pay on your mortgage.

Sample PMI calculation

PMI rate

1%

Mortgage

$200,000

PMI total

$2,000

Monthly payment

$167

How you pay PMI

You may pay PMI up front at closing, or the premium may be added to your monthly payment. Or you may be required to pay both an upfront and monthly premium. It depends on the lender and type of loan.

Who avoids PMI

Homebuyers who put down at least 20 percent of the home’s purchase price on a conventional loan avoid PMI. If you want to buy a home but don’t have a big down payment, ask your lender about your options. You might be eligible for a no-PMI loan. For example, Bank of America offers the Affordable Loan Solution® mortgage, which lets borrowers with modest incomes put down as little as 3 percent with no mortgage insurance required.1

How to stop paying PMI

If certain conditions are met, your loan servicer will automatically cancel your PMI when your loan-to-value ratio (or LTV, a measure of equity) reaches 78 percent of the original value of your home.

However, you can call or write a letter asking for it to be canceled when your LTV hits 80 percent, although you may be required to pay for a new appraisal. (These cancellation rules do not apply to the mortgage insurance premium on FHA loans.)

Sample loan-to-value ratio

Mortgage balance

$240,000

Original appraised value

$300,000

Loan-to-value ratio

0.80

Read more about LTV and how it’s used.

  1. Available for fixed-rate purchase loans with terms of 25 or 30 years and on primary residences only. Certain property types are ineligible. Borrower(s) must not have an individual or joint ownership interest in any other residential property at time of closing. Maximum purchase loan-to-value is 97% and maximum combined purchase loan-to-value is 103%. For loan-to-values >95% any secondary financing must be from an approved Community Second Program; ask for details. Homebuyer education may be required. Restrictions apply regarding co-borrowers. Maximum income and loan amount limits apply.
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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

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