What Is PMI and When Do You Need It?

If you’re in the market for a home or considering refinancing, you’ve probably heard the term PMI tossed around. But what exactly is PMI? And more importantly, when do you need it? At Rapid Home Loan, we believe that understanding the ins and outs of PMI can make a big difference in your mortgage journey.

Let’s break it down.

What Is PMI (Private Mortgage Insurance)?

PMI stands for Private Mortgage Insurance, and it’s something that many homebuyers encounter when putting less than 20% down on a home. PMI is essentially an insurance policy that protects the lender in case you default on your loan. Since you’re borrowing a larger amount (i.e., putting less down), PMI reduces the lender’s risk.

Think of PMI as an extra cost for borrowers who don’t have a large enough down payment to meet the 20% threshold. This extra cost typically gets added to your monthly mortgage payment, and the price can vary depending on your loan type, the size of your down payment, and the length of your loan.

When Do You Need PMI?

So, when do you actually need PMI? Here’s the basic rule:

If you’re putting less than 20% down on a home, there’s a good chance you’ll need PMI. That’s the threshold many lenders use to determine whether or not you’re required to have this extra coverage. PMI is especially common with conventional loans and can also be a requirement with FHA loans (though it’s structured differently with FHA).

How Does PMI Work?

PMI is usually rolled into your monthly mortgage payment, but there are a few different ways it can be structured:

Monthly Premiums: The most common way to pay PMI. It’s added to your monthly mortgage payment until you’ve built up at least 20% equity in your home. Once that happens, PMI can be removed.
Upfront PMI: Sometimes, lenders offer an upfront PMI option. You would pay the PMI premium as a lump sum at closing, rather than adding it to your monthly mortgage payment.
Combination: Some loans require both an upfront PMI payment and monthly premiums.

How Much Does PMI Cost?

The cost of PMI varies widely depending on factors like your loan type, the size of your loan, and the amount of your down payment. On average, PMI costs between 0.3% and 1.5% of the original loan amount annually.

For example, on a $250,000 loan with a 1% PMI premium, you’d pay around $2,500 per year, or about $208 per month. While this adds to your monthly payments, it can be a small price to pay for the ability to buy a home with less than a 20% down payment.

How to Avoid PMI

While PMI can make homeownership more accessible for buyers with smaller down payments, it’s not something you’re stuck with forever. There are a few ways to avoid PMI, or eliminate it once it’s in place:

Make a Larger Down Payment: The most straightforward way to avoid PMI is to make a 20% down payment when you buy your home. This will eliminate the need for PMI altogether.
Consider a “Piggyback” Loan: Some buyers choose to take out a second mortgage alongside their main loan to cover part of the down payment. This is called a “piggyback loan,” and while it can help you avoid PMI, it’s important to weigh the extra costs of a second loan.
Refinance Once You Reach 20% Equity: If you’ve had your mortgage for a while and your home’s value has increased, you may be able to refinance and get rid of PMI once you’ve built up 20% equity.

Does PMI Go Away?

Yes! Once your loan balance reaches 80% of the home’s original value, you can request to have PMI removed. Additionally, when your loan balance hits 78% of the home’s value, PMI is automatically cancelled by law (provided you’re current on your payments).

If you’re refinancing, your lender may also be able to remove PMI depending on the new loan terms and the equity you’ve built.

Why Work with Rapid Home Loan?

At Rapid Home Loan, we understand that the home buying process can feel overwhelming—especially when dealing with PMI and all the other financial aspects of a mortgage. That’s why we’re here to simplify things for you. Whether you’re a first-time homebuyer or refinancing, we’ll walk you through every step, answer your questions, and help you make the best decision for your financial future.

Ready to find a mortgage with or without PMI? We’re here to help!

Lawrence Ligonde