PMI stands for private mortgage insurance, and it's one of those line items that shows up on a mortgage estimate and quietly makes everything more expensive. Most explanations of it are written by people trying to sell you a mortgage. Here's mine.
When you get charged PMI
The rule of thumb is simple: PMI usually applies when your down payment is under 20% of the purchase price. Put down 20% or more and you generally skip it entirely. Put down less and the lender adds PMI to your monthly costs until you've built up enough equity.
Why 20%? From the lender's point of view, a borrower with a small deposit is a bigger risk. If the borrower stops paying and the house has to be sold, a thin slice of equity might not cover the shortfall. PMI is how the lender covers that gap.
The bit that surprises people
PMI protects the lender, not you. You pay the premium every month, and if things go wrong, the payout goes to the bank. It does nothing for you if you lose your job, nothing if the roof caves in, nothing if you fall behind on payments. You're buying an insurance policy where someone else is the beneficiary.
I'm not saying it's a con. It does something useful: it's the price of being allowed to buy a house with less than 20% down, and for plenty of people that trade is worth making. Waiting years to save a full 20% deposit has costs too. But you should be clear-eyed about what you're paying for. It's a fee for borrowing with a small deposit, dressed up as insurance.
What it costs
PMI typically runs somewhere between roughly 0.3% and 1.5% of the loan amount per year, depending on your credit, your deposit size, and the loan itself. That range sounds small until you put a real loan behind it.
Take a $320,000 loan. Even at a modest 0.5%, that's $1,600 a year, roughly $133 a month, for insurance that isn't yours. At the top of the range it's several times that. This is money that builds no equity, earns no interest, and buys you nothing except permission to borrow.
When you're working out what a house will really cost you each month, add PMI to the payment before you judge affordability. The mortgage calculator will give you the principal and interest; PMI, tax and insurance sit on top of that number, not inside it.
How to get rid of it
The good news is that PMI isn't forever. On conventional loans it can be removed once you reach 20% equity in the home. That can happen through your regular payments chipping away at the loan, through extra payments, or through the home's value rising. Typically you have to ask the lender and they may want an appraisal, but it's a normal request, not a favour.
There's also a backstop: at 22% equity, PMI terminates automatically on conventional loans. You shouldn't wait for the backstop, though. The gap between 20% and 22% equity can take a surprisingly long time to close with regular payments alone, and every month in that gap is another PMI premium you didn't need to pay. Diarise it, watch your balance, and ask the moment you cross 20%.
If you're throwing extra money at the loan specifically to kill PMI sooner, that's one of the more satisfying uses of spare cash I know of. You're effectively earning the PMI premium back, guaranteed, on top of the interest you save.
Should you just save a bigger deposit?
Sometimes, yes. If you're close to 20% already, stretching to reach it can be worth it because you avoid PMI from day one and never have to fight to remove it. If you're a long way off, waiting years while paying rent has its own price, and taking the PMI hit to buy sooner can still be the right call.
There's no universal answer, but there is a way to make it concrete: play with the numbers. Our down payment calculator shows what different deposit levels do to your loan size and where the 20% line sits for the price you're looking at. Seeing the actual figures for your situation beats any rule of thumb.
The short version
PMI is a monthly fee for buying with less than 20% down. It costs roughly 0.3% to 1.5% of the loan a year, it protects the lender rather than you, and it's removable at 20% equity if you ask, 22% if you don't. Pay it if it gets you a home you'd otherwise wait years for. Then get rid of it as fast as you reasonably can.