What PMI Is and When You Pay It
PMI (private mortgage insurance) is an insurance premium you pay monthly when you put down less than 20% on a home purchase. The lender requires it to protect themselves if you stop paying the loan. You do not own anything for this payment — it protects the bank, not you — and it goes away once you reach 20% equity in the home.
The amount you pay depends on three things: how much you borrowed, how much you put down as a percentage, and the insurance company's rate for your risk profile. Knowing how to calculate it yourself keeps you from overpaying and helps you understand when it makes sense to pay down the loan faster to shed the insurance sooner.
Key Takeaways
- PMI is calculated as a percentage of your loan amount, typically ranging from 0.5% to 1.5% annually, divided into monthly payments.
- Your down payment percentage is the biggest driver of your PMI rate — the smaller your down payment, the higher your insurance premium.
- You can estimate your PMI using your loan amount, down payment percentage, and credit score, then multiply by the annual rate and divide by 12.
- PMI drops off automatically when you reach 20% equity, though you can request removal earlier if your home has gained value.
- Paying extra toward principal speeds up the point where PMI disappears, which can save thousands over the life of the loan.
The Basic PMI Calculation Formula
The simplest way to estimate your monthly PMI is to use this formula:
Monthly PMI = (Loan Amount × Annual PMI Rate) ÷ 12
For example: if you borrowed $300,000 and the annual PMI rate is 0.8%, the calculation is ($300,000 × 0.008) ÷ 12 = $200 per month. The annual PMI rate itself depends on your down payment percentage and credit score, which is why two borrowers with the same loan amount can pay different premiums.
This formula works for most conventional loans. Some loans use upfront mortgage insurance (a one-time payment at closing) instead of monthly payments, and those are calculated differently — as a percentage of the loan amount paid upfront rather than spread across months.
How Down Payment Percentage Affects Your Rate
The lower your down payment, the higher your annual PMI rate. A borrower putting down 5% pays a steeper rate than one putting down 15%, because the lender's risk is higher. Most lenders publish rate tables that show the annual PMI percentage for each down payment bracket.
A typical range looks like this: 5% down might be 1.2% to 1.5% annually, 10% down might be 0.8% to 1.0%, and 15% down might be 0.5% to 0.7%. These are examples only — actual rates vary by lender, loan type, and your credit score. Ask your lender for their specific rate table before you lock in a loan.
The reason this matters for your calculation is that you cannot use a single PMI rate for all scenarios. If you are comparing what you would pay with a 5% down payment versus a 10% down payment, you need to plug in the correct annual rate for each scenario, then run the formula.
The Role of Credit Score in PMI Pricing
Your credit score affects which annual PMI rate you get within each down payment bracket. A score of 740 or higher typically lands you the lowest rate for your down payment percentage. A score between 680 and 739 usually costs more. Below 680, the rate climbs further.
This means two borrowers with the same $300,000 loan and 10% down payment could pay different monthly PMI amounts if one has a 750 credit score and the other has a 680 score. The difference might be $30 to $50 per month, which compounds to hundreds or thousands over several years.
Before you calculate your PMI, check your credit score and ask your lender what rate you may have access to for. If your score is lower than you expected, improving it before you apply for the mortgage can lower your PMI cost significantly.
Working Through a Real Example
Let's say you are buying a $400,000 home, putting down $60,000 (15%), and borrowing $340,000. Your credit score is 720. Your lender tells you the annual PMI rate for a 15% down payment at your credit tier is 0.65%.
The calculation: ($340,000 × 0.0065) ÷ 12 = $184.17 per month. Over a 30-year loan, that is $66,300 in total PMI payments — a real cost that affects your monthly budget and your total interest paid.
Now imagine you put down $80,000 instead (20%). You would borrow $320,000 and pay zero PMI. The difference between the two scenarios is $184.17 per month, or $2,210 per year. That extra $20,000 down payment eliminates PMI entirely and saves you money every single month.
When PMI Drops Off Automatically
Federal law requires lenders to cancel PMI automatically once you reach 20% equity in the home through regular payments. For a $400,000 home with a $340,000 loan, that means when your loan balance drops to $320,000, the PMI goes away.
How long this takes depends on your loan term, interest rate, and how much you pay toward principal each month. On a 30-year loan at a standard rate, it typically takes 8 to 12 years of on-time payments. If you pay extra toward principal, you can reach 20% equity faster and shed PMI sooner.
You do not have to wait for automatic cancellation. If your home has gained value since you bought it, you can request PMI removal earlier by getting a new appraisal. If the home is now worth more, your equity percentage may have climbed above 20% even though your loan balance has not dropped that far. Some lenders allow removal at 15% equity if you have made on-time payments for at least two years.
How Extra Payments Speed Up PMI Removal
Every dollar you pay toward principal reduces your loan balance and moves you closer to 20% equity. Paying an extra $100 per month on a $340,000 loan shortens the time to PMI removal by several months to over a year, depending on your interest rate and loan term.
To see the impact, calculate how many months it takes to reach 20% equity at your current payment, then recalculate with an extra payment amount. The difference is how much time and money you save. Even small extra payments add up — an extra $50 per month can save you $1,000 or more in PMI over the life of the loan.
Before you commit to extra payments, make sure you have an emergency fund and no high-interest debt. Paying down a mortgage faster makes sense only if you are not sacrificing financial stability elsewhere.
Frequently Asked Questions
Can I avoid PMI by putting down less than 20%?
Not on a conventional loan. If you put down less than 20%, PMI is required. Some loan programs like FHA loans have their own insurance (called mortgage insurance premium, or MIP) that works differently and may be required even at 20% down. Your only way to avoid PMI is to reach 20% equity or wait until your home value rises enough that you can refinance without it.
Does PMI ever come back after it is removed?
No. Once PMI is cancelled and you reach 20% equity, it does not return. If you refinance the loan later and your new loan amount puts you back below 20% equity, you would pay PMI on the new loan, but the original PMI is gone.
What is the difference between PMI and mortgage insurance on FHA loans?
FHA loans use mortgage insurance premium (MIP) instead of PMI. MIP is often higher than PMI and may be required for the life of the loan if you put down less than 10%. PMI on conventional loans drops off at 20% equity. Ask your lender which loan type makes sense for your situation.
Should I pay points to lower my interest rate instead of putting down more money?
That depends on how long you plan to stay in the home and your current interest rate. Paying points lowers your monthly payment and total interest, but it costs money upfront. Putting down more money lowers PMI and principal but does not change your interest rate. Run both scenarios with your lender to see which saves you more over your expected time in the home.
How do I know if my lender is charging me the correct PMI rate?
Ask your lender for their PMI rate table for your down payment percentage and credit score range. Compare it to rates from other lenders. PMI rates vary, so shopping around before you lock in a loan can save you hundreds per year. Your loan estimate (provided within three days of application) must show your estimated PMI payment, so you can verify the math yourself using the formula above.