What is PMI on a Mortgage?

Traditional advice says you need to have a down payment of 20% to buy a home. In Florida, the average home price is $384,811 (as of July 2025), so a 20% downpayment is a big ask for most households. This is where PMI, or private mortgage insurance, comes in. But what exactly is PMI on a mortgage?

In this post, we’ll walk you through what PMI is, why lenders require it, how much it costs, and whether there are ways to avoid it. Whether you’re a first-time homebuyer or an experienced investor, understanding PMI can help you make a more informed and affordable decision.

What is PMI?

Private Mortgage Insurance (PMI) is a type of insurance you pay for that protects the mortgage lender if you’re unable to make your loan payments. When you put down less than 20% on a conventional mortgage, the lender takes on more risk, so PMI helps protect their investment by covering a portion of their losses if you were to default on the loan.

PMI is typically required for conventional loans with down payments under 20%, since lower equity at the outset makes you a higher-risk borrower. While PMI protects the lender, not you, it still offers a key benefit: it allows you to qualify for a mortgage even if you haven’t saved a large down payment.

How Much Does PMI Cost?

PMI is an added cost to your mortgage. The amount of PMI needed is determined by several factors:

• Loan amount
• Loan-to-value ratio
• Credit score
• Down payment percentage
• Type of mortgage

On average, PMI costs between 0.46% and 1.5% of your original loan amount annually. For example, if you borrow $250,000 and your PMI rate is 0.8%, you’ll pay around $2,000 per year, or about $167 per month.
Borrowers with higher credit scores and larger down payments will usually qualify for lower PMI rates.

How Is PMI Paid?

There are three main ways PMI can be paid:

1. Monthly Premiums – The most common method, where PMI is added to your regular mortgage payment.
2. Upfront At Closing – A one-time payment made at closing. This requires more cash up front, but will lower your monthly payment. It’s worth noting this sum is often not refunded if you end up moving or refinancing before the PMI term is finished.
3. Hybrid Payment – Some lenders offer a combination of a medium upfront payment and lower monthly payment.
   

It’s worth discussing the options with your lender. While monthly PMI is the standard, some buyers prefer the upfront option to keep monthly payments lower, especially if they plan to stay in the home long term.

Can You Avoid PMI?

If you want to skip PMI entirely, here are a few strategies:

• Put down 20% or more. Putting down a higher down payment reduces risk to the lender, bypassing the need for PMI.
• Use a piggyback loan. A piggyback loan is a type of loan that involves taking out a second, smaller loan to cover the down payment of your home, in addition to your mortgage. It’s also referred to as a 80/10/10 loan, because the primary mortgage covers 80% of the home’s value, the second mortgage covers 10% of the value for a portion of the downpayment, and the actual downpayment is the last 10%.
• Look for lender-paid PMI. Some lenders will cover the cost of PMI in one upfront sum but charge a higher interest rate on the mortgage.
• Consider government-backed loans. FHA, VA, and USDA loans have their own rules and costs for mortgage insurance, but they don’t involve PMI in the traditional sense.

When Does PMI Go Away?

The good news is that PMI doesn’t last forever.

PMI typically ends when your loan-to-value ratio reaches 78% of the home’s original value. You can also request removal once your loan hits 80% of the home’s value-either through regular payments or home appreciation.

Can PMI Help You?

PMI isn’t ideal-but it’s not the enemy either. It’s simply a tool lenders use to reduce risk, and it gives buyers more flexibility to purchase a home without a large down payment.

If you’re planning to buy a home with less than 20% down, be prepared to factor PMI into your monthly mortgage payment. And remember, it’s often temporary. With responsible payments and a little home appreciation, you can remove PMI and reduce your housing costs over time.

Talk to the team at Chris Doering Mortgage about your PMI options, and make sure you fully understand how it fits into your mortgage strategy. Homeownership may be closer than you think.