PMI: The $150 a Month You Pay for a Small Down Payment

If you've ever looked into buying a house, you've probably heard that you need 20 percent down. On a $250,000 house, that's $50,000, which is a fantasy number for most first-time buyers. So people buy with 5 percent or 10 percent down instead, and then a mysterious line shows up on their mortgage statement: PMI. It costs real money every month, and most buyers don't understand what it is until they're already paying it. Here's the plain version.

PMI stands for private mortgage insurance. It protects the lender, not you, in case you stop paying. If you put less than 20 percent down, the lender considers the loan riskier, so you pay for insurance on their risk. On a $250,000 house with 10 percent down, your loan is $225,000, and PMI typically costs 0.5 to 1 percent of the loan amount per year. At 0.8 percent, that's $1,800 a year, or $150 a month, added to your mortgage payment. That's $150 a month for something that gives you zero benefit if things go wrong. It doesn't save your house, it doesn't lower your payment, and it doesn't build equity.

Run that over time and it stings. If you pay $150 a month for five years, that's $9,000 gone, and you have nothing to show for it. No equity, no asset, no refund. It's just the toll for buying with a small down payment. That's not a reason never to buy with less than 20 percent down, but it is a reason to go in with your eyes open and a plan to get rid of it.

Because you can get rid of it, and that's the part most buyers miss. PMI usually drops off automatically once your loan balance falls to 78 percent of the home's original value, based on the original amortization schedule. But you don't have to wait for automatic. Once you've paid the loan down to 80 percent of the home's value, you can ask your lender to cancel it, though they'll usually require a good payment history and sometimes a new appraisal to prove the home's value. If home prices in your area have gone up, that appraisal can be your best friend: a house that appraises higher means your equity percentage is higher, and you can hit 80 percent equity sooner than the payment schedule alone would suggest.

Let's make that concrete. You buy at $250,000 with 10 percent down, so you start with $25,000 in equity. To reach 20 percent equity on the original value, you need to owe $200,000 or less, which means paying off $25,000 of principal. On a standard 30-year mortgage, that takes roughly seven to eight years of normal payments, because early payments go mostly to interest. That's seven years of PMI, or about $12,600 at $150 a month, if you just wait. But if your home appraises at $280,000 after a few years, 80 percent of that value is $224,000, and you only need to owe $224,000 to ask for cancellation. You might get there years earlier, saving thousands.

There are also loans that avoid PMI entirely, and they're worth knowing about. Some credit unions and lenders offer loans with lender-paid mortgage insurance, where the rate is slightly higher instead of a separate PMI charge. That can be better or worse depending on the numbers, so compare the total monthly payment, not just whether PMI is listed. VA loans for eligible veterans have no PMI at all, though they have a funding fee. And some first-time buyer programs offer down payment assistance that gets you to 20 percent equity without saving the whole amount yourself, though those programs come with their own rules and sometimes repayment terms, so read them carefully.

So is buying with less than 20 percent down a mistake? Not automatically. Renting for five extra years while you save $50,000 also costs money, often a lot more than PMI. If rent in your area is $1,500 a month, five years of renting costs $90,000, and you build zero equity. Paying $150 a month in PMI for a few years while your mortgage builds equity and your home possibly appreciates can easily be the better deal. The mistake isn't paying PMI. The mistake is paying PMI forever because you never checked whether you could cancel it.

Here's the checklist. Before you buy, ask the lender for the PMI amount in writing and how it gets cancelled. After you buy, once a year, do the equity math: what do you owe, what is the home likely worth, and are you at 80 percent yet? If you are, call the lender and ask for cancellation in writing. If you're close, ask what appraisal or payment history they'd need. And never assume it fell off on its own. Servicers make mistakes, automatic cancellation is based on the original schedule, and nobody is going to call you to tell you you're overpaying.

PMI is the price of getting into a house before you have 20 percent saved. It's not a scam, but it's not free either, and it's not permanent unless you let it be. Know the number, know the cancellation rule, and check it every year. That one phone call could be worth thousands.

Disclosure: This article was drafted with AI assistance and reviewed by the author.