What Is PMI and How Can You Avoid It?
If you’re putting less than 20% down on a conventional loan, your lender will probably require private mortgage insurance — PMI. It shows up as an extra monthly charge and a lot of buyers are caught off guard by it. Here’s everything you need to know.
What Is PMI?
PMI is insurance that protects your lender — not you — if you default on your loan. It exists because statistically, buyers with smaller down payments are considered higher risk. If you stop making payments and the lender has to foreclose, PMI covers part of their loss.
It doesn’t protect you or provide any benefit to you directly. You pay the premiums; the lender gets the coverage. This is one of those facts that frustrates buyers when they hear it — but understanding it helps you plan around it.
How Much Does PMI Cost?
PMI typically runs between 0.5% and 1.5% of your loan amount annually, divided into monthly payments. On a $300,000 loan, that’s $125–$375 per month. On a $350,000 loan, it’s closer to $145–$440 per month.
The exact rate depends on your credit score, down payment percentage, and loan type. Better credit generally means lower PMI. Larger down payment means lower PMI.
PMI vs. MIP — What’s the Difference?
PMI applies to conventional loans. FHA loans have their own version called MIP — mortgage insurance premium. MIP works differently: it includes an upfront premium (typically 1.75% of the loan, usually rolled in) plus an annual premium paid monthly.
The key difference: PMI on a conventional loan can be canceled. FHA MIP typically stays for the life of the loan if you put down less than 10%. For buyers who plan to stay in the home long-term, this difference matters significantly.
4 Ways to Avoid PMI
1. Put 20% down. The classic route. If you put 20% down on a conventional loan, PMI is not required. This isn’t always achievable, but it eliminates the cost entirely from day one.
2. Use a VA loan. If you’re an eligible veteran, active duty service member, or surviving spouse, VA loans require zero down payment and zero mortgage insurance — ever. This is the single best PMI avoidance strategy available. Learn more about VA loans in NWA →
3. Use a USDA loan. For buyers in eligible rural and suburban areas — which covers more of Northwest Arkansas than most people expect — USDA loans also require zero down and no monthly PMI. There is a small annual guarantee fee, but it’s lower than conventional PMI.
4. Wait for 20% equity and cancel it. Under the Homeowners Protection Act, lenders are required to cancel PMI automatically when your loan balance reaches 78% of the original purchase price (i.e., you’ve built 22% equity through payments). You can also request cancellation when you reach 20% equity — you may need a new appraisal to confirm the value, but it’s worth doing.
A fifth option — lender-paid PMI — exists where the lender covers the PMI in exchange for a slightly higher interest rate. This can make sense in some situations but should be modeled carefully, since a higher rate stays for the life of the loan while PMI eventually goes away.
Should PMI Stop You From Buying?
Not necessarily. Plenty of buyers pay PMI and it’s the right call for their situation. If you have a strong income, can comfortably afford the payment including PMI, and the right home is available now — waiting years to save a bigger down payment while prices and rates shift isn’t always the smart move.
The honest answer is: it depends on your numbers. When we work through your pre-approval together, I’ll show you the full monthly payment including PMI, compare it to scenarios with different down payment amounts, and help you make the decision that actually makes sense for your life.
Have questions about PMI in your specific situation? Reach out and let’s talk through it →
Kiley Conner | NMLS# 1453865 | Benchmark Mortgage | Licensed in AR, MO, KS & OK | Equal Housing Lender
