Note: Consumer guides do not constitute any change in NAR policy. Real estate professionals must ensure they market properties consistent with relevant MLS rules and educate sellers on the choices available.
Buying a home—especially your first—comes with lots of new terms and financial details to learn. One term that often causes confusion is private mortgage insurance (PMI). Let’s break down what it is, why it matters, and how it could impact your homebuying journey.
What Is PMI?
PMI is an insurance policy that protects the lender (not the buyer) in case you default on your loan. If you’re buying with a conventional mortgage and putting down less than 20%, your lender will likely require PMI.
How Does PMI Work?
Your lender arranges the PMI as part of your conventional loan. It’s usually provided by a private mortgage insurance company, and you’ll most often pay the premium as part of your monthly mortgage payment.
Other payment options may include:
- A one-time lump sum at closing.
- A combination of an upfront fee plus smaller monthly payments.
How Much Does PMI Cost?
The cost depends on several factors, including:
- Loan amount
- Size of your down payment
- Credit score
- Loan type (fixed-rate vs. adjustable-rate)
Typically, PMI ranges from 0.2% to 2% of your loan amount per year. Tools like Freddie Mac’s PMI calculator can help you estimate monthly costs with different down payment amounts.
Can You Avoid PMI?
Yes, there are ways to avoid PMI, though each comes with trade-offs:
- Put down 20% or more.
- Apply for a VA or USDA loan (if eligible).
- Consider lender-paid mortgage insurance (LPMI).
- Use a piggyback loan (a second loan to help cover the 20% threshold).
Carefully weigh these options with your lender, since each impacts your overall costs.
Can You Cancel PMI?
Yes, PMI doesn’t last forever. You can request cancellation when your loan balance falls to 80% or less of your home’s original value. If your home has gained value, you might reach this point sooner by refinancing or getting an appraisal.
By law, lenders must automatically cancel PMI once your loan-to-value (LTV) ratio drops below 78% or you reach the halfway point of your loan term.
Note: FHA loans are different—they require mortgage insurance premiums (MIP) that typically last the life of the loan.
The One Big Beautiful Bill Act and PMI Deductions
Signed into law on July 4, 2025, the One Big Beautiful Bill Act introduced new tax changes for homeowners:
- Makes the mortgage interest deduction permanent on loans up to $750,000 ($375,000 if married filing separately).
- Temporarily quadruples the state and local tax deduction.
- Starting in 2026, allows PMI to be deducted as part of the mortgage interest deduction.
Who qualifies?
- Full deductibility for taxpayers with AGI of $100,000 or less ($50,000 if married filing separately).
- Deduction phases out and ends completely for AGI above $109,000 (for joint returns).
- Only available to those who itemize deductions instead of taking the standard deduction.
Always consult a qualified tax professional to determine the best strategy for your unique situation.
Final Thoughts
Buying a home can feel overwhelming, but understanding PMI helps you make more informed financial decisions. Your real estate agent can guide you through the process, and an attorney can explain how state-specific laws apply to your purchase.
And remember: REALTORS® follow the NAR Code of Ethics, which means they’re committed to working in your best interest.
For more resources, visit facts.realtor.
