Putting Less Than 20% Down Adds a Monthly Charge That Protects Your Lender, Not You. Here Is What You Pay.
Bottom line
Private mortgage insurance (PMI) typically costs 0.5%–1.5% of your loan per year — on a $300,000 loan, that is $125–$375 extra per month until you reach 20% equity.
In this guide
What it is
Private mortgage insurance (PMI) is a monthly fee added to your mortgage payment when you make a down payment of less than 20% on a conventional home loan. It protects the lender — not you — against losses if you default. Despite benefiting only the lender, you pay for it. PMI is automatically canceled once your loan balance reaches 78% of the original home value.
By the numbers
On a $400,000 home with 5% down ($20,000), your loan is $380,000. PMI at 0.8% costs about $253/month. Compare that to a 20% down payment ($80,000) — no PMI. At $253/month, PMI costs $3,036/year. For the 6–8 years it typically takes to build 20% equity with a small down payment, total PMI paid can reach $18,000–$24,000 — plus the cost of borrowing more at a higher balance.
How it works
Your lender orders PMI when you close with less than 20% down on a conventional loan. The premium is based on your credit score, loan-to-value ratio, and loan type. Higher credit score and larger down payment mean lower PMI rates. As you make mortgage payments and/or your home appreciates, your loan-to-value ratio decreases. When it reaches 80%, you can request PMI cancellation in writing. Under the Homeowners Protection Act, lenders must automatically cancel PMI when you reach 78% LTV based on your original payment schedule.
The catch
Lenders are not required to notify you when you hit 80% LTV. Tracking that is your responsibility. Many homeowners overpay PMI for years because they did not know to request cancellation. If your home has appreciated significantly, you may qualify for early cancellation with a new appraisal, though lenders set their own policies on this.
Why it matters
PMI is often framed as simply the cost of buying with a smaller down payment. That is true — but it is worth calculating the actual number before assuming it is acceptable. For some buyers, saving to 20% takes 3–5 additional years of renting while home prices may rise further. For others, that savings window and PMI cost are better than years of delayed ownership. Make the trade-off consciously, not by default.
Common mistakes
- 1Waiting for the lender to automatically cancel PMI. Lenders must cancel at 78% LTV, but you can request cancellation at 80% — which may be months or even years earlier if you have made extra payments or your home has appreciated. Most borrowers who pay more PMI than necessary simply did not ask.
- 2Confusing PMI with FHA mortgage insurance (MIP). FHA loans have mortgage insurance premiums instead of PMI, and for FHA loans closed after June 2013, MIP cannot be removed unless you refinance into a conventional loan. If you have significant equity and an FHA loan, refinancing to a conventional loan to eliminate MIP may be worth running the numbers on.
- 3Treating 20% down as a non-negotiable minimum. PMI adds real cost — but so does delaying a purchase for years while saving the additional down payment in a rising market. In some situations, buying sooner with PMI and building equity immediately outperforms waiting. The right answer depends on your local market, savings rate, and financial stability.
FAQ
Is there a way to buy with less than 20% down and avoid PMI entirely?
Yes — with a piggyback loan structure (sometimes called 80-10-10). You take a primary mortgage for 80% of the purchase price, a second mortgage or home equity loan for 10%, and put 10% down. Because your primary mortgage is at exactly 80% LTV, no PMI is required. The tradeoff is that the second loan has its own rate and payment. Whether this is cheaper than PMI depends on the rate you get on the second loan.
Does PMI protect me if I lose my job and cannot make payments?
No. PMI protects the lender, not you. If you default, the lender files a claim with the PMI provider and receives partial reimbursement. You still face foreclosure and credit damage. PMI is not the same as mortgage payment protection insurance, which is a separate product that pays your mortgage if you become disabled or unemployed — and which is generally not considered worth buying.
Official resources
What to check next
If you currently pay PMI, calculate your loan-to-value ratio: divide your current loan balance by your home's original appraised value. If the result is 80% or below, write to your servicer requesting PMI cancellation — you may save $100–$400/month starting next month.
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