Anyone who’s ever thought about buying a home has heard the same financial advice: have a 20% down payment ready. That rule has been imprinted into borrowers’ psyches for nearly 100 years, and while it’s still sound advice, it’s not a strict requirement.
You can still buy a house with less than 20% down. In fact, the median downpayment for U.S. home buyers was 15% in 2025, but be prepared to pay for private mortgage insurance (PMI). Keith Gumbinger, mortgage expert and Vice President of HSH, explains how PMI works, how much it will cost you, and whether it’s worth avoiding.
What is PMI?
Private mortgage insurance protects the lender when a borrower purchases a home with a small down payment—usually less than 20%. Even though PMI protects the lender, the borrower pays for it.
The purpose of PMI on mortgages is to help the lender recoup their expenses in the case a borrower defaults on their loan. It fills the monetary gap between a borrower’s low down payment and the desired 20% down payment.
“That PMI is really to cover the lender’s acquisition costs of getting the property back,” Gumbinger says. Those costs can include legal fees, foreclosure expenses, property maintenance, insurance, taxes, and the costs of reselling the home.
How Does PMI Work?
Most borrowers pay PMI as part of their monthly mortgage payment. The lender collects the premium and forwards it to the mortgage insurer. Depending on the loan, PMI may be structured in different ways.
Monthly PMI is the most common option, while annual PMI requires you to pay the first year’s premium at closing, then continue with the scheduled premium payments, paying the full annual premium once each year.
Single-premium PMI requires you to pay the entire cost upfront at closing, typically around 3% to 5% of the loan value. The lender calculates the total expected cost of the policy, meaning the cost until it would automatically cancel at 78% LTV, and you pay the full amount in one lump sum.
How Much Does PMI Cost?
PMI generally costs between 0.46% and 1.50% of the original loan amount each year, although your actual premium depends on several factors. “The base starts with your loan-to-value ratio,” Gumbinger says. The more skin you have in the game (the closer to 20% your down payment is), the less your PMI will generally cost.
The base varies based on mortgage characteristics. Long-term fixed rate mortgages, short-term fixed rate mortgages, and adjustable-rate mortgages all have different starting points.
A variety of offsets can then increase the base cost, including:
- Credit Score: “Mortgage lenders use up to nine buckets of credit scores,” Gumbinger explains. “The lower your credit score is, the riskier borrower you are perceived to be and the higher your premium would be.”
- Debt-to-Income Ratio: The more debt you have, the higher your PMI premiums. Theoretically, lenders believe if you have excess debt, you’re more likely to default in the future.
Unlike other insurance policies, you don’t get to choose your PMI company, and you don’t get to negotiate. “There’s no basis for shopping around to find a better price. The prices are all the same,” Gumbinger says.
When Is PMI Required?
Whether or not you need PMI on a mortgage depends on your down payment size and the type of mortgage you have.
Conforming, Conventional Loans
The majority of borrowers take out a conforming, conventional loan, meaning the mortgage meets the underwriting standards of Fannie Mae and Freddie Mac—government-sponsored enterprises that support around 70% of the mortgage market, according to the National Association of Realtors.
Nonconforming Loans
Nonconforming loans have different PMI down payment thresholds that can be higher or lower than 20%. “They may want a different level of coverage than what Fannie or Freddie might want,” says Gumbinger. “The lender is free to select those if they want to hold a loan on their books.”
FHA Loans
FHA loans—federally-backed mortgages designed for first-time home buyers with lower credit scores and minimal down payments—are unique. Instead of PMI, borrowers pay mortgage insurance premiums (MIP). At closing, they pay 1.75% of their loan amount into a self-insurance pool, normally rolled into the mortgage.
Unlike PMI, FHA’s MIP doesn’t use risk-based pricing. “The percentage factor used to calculate costs is the same whether your credit score is a 630 or a 720. They don’t have a risk-based premium based upon personal borrower characteristics for their mortgage insurance,” Gumbinger says.
In addition to the upfront 1.75%, borrowers pay annual premiums equal to 0.5% to 0.75% of the remaining loan amount for loans with 30-year terms. For loans with terms of 15 years or less, the range would be 0.15% to 0.65%, but relatively few FHA-backed loans are written with short terms. If you put less than 10% down, these premiums exist for the life of the loan.
How Do You Get Rid of PMI?
If you have a conventional loan and have followed a normal repayment schedule, PMI can be removed from your mortgage once your loan-to-value (LTV) ratio reaches 78%. Legally, your lender must automatically cancel it then, so long as your payment history is in good standing.
Your lender may also be able to cancel your PMI voluntarily, Gumbinger explains. “A borrower can start to request PMI [cancellation] when their loan-to-value ratio gets to 80%. The lender is free to say no.”
When can PMI be removed from an FHA loan? If you have an FHA loan and put more than 10% down, the annual premiums cancel after 11 years. If you put less than 10% down, you’ll need to refinance into a conventional loan to get rid of mortgage insurance.
How to Achieve a Lower LTV
Achieving a 78% or 80% LTV is done in two ways: through amortization and appreciation. Amortization is the process of slowly paying off your mortgage and gaining equity. It can take years to reach a 78% or 80% LTV, depending on the size of your down payment.
Appreciation is when your property value rises because of changes in the local real estate market. It can quickly and dramatically reduce your LTV.
Example: You bought a $200,000 home with 10% down ($20,000). You took out a loan for $180,000. The loan-to-value ratio ((loan amount ÷ property value) x 100) would be 90%. Imagine your home was in a hot real estate market, and the property value increased 16% in just a few years. Your $200,000 home is now valued at $232,000. The new LTV is 77.5%.
Does that mean your PMI automatically cancels because it’s below 78% LTV? Not quite. Lenders require loan “seasoning,” a specific length of time that must pass since your mortgage began.
If you’d like to request PMI cancellation with a conventional Fannie/Freddie loan because your home value has increased, but you’ve had the loan for less than five years, they will require a 75% LTV, along with a verified appraisal of the property.
“Property price appreciation is ephemeral, or can be ephemeral in the right market conditions,” Gumbinger explains. “Homes that appreciated rapidly back in 2007 or 2006 or even into 2008, some of those properties dropped 50 percent or more.” In growing real estate markets, lenders want a mortgage to be seasoned as proof the new real estate value is there to stay.
How Can You Avoid PMI?
The best way to avoid PMI altogether is to buy a home with a 20% or larger down payment. However, that’s not possible for everyone. “In today’s marketplace, it’s really hard to come up with a massive down payment,” Gumbinger says.
That doesn’t mean you’re out of luck if you don’t have 20%. “There are tipping points for PMI costs,” explains Gumbinger. PMI rates are divided into different buckets, and in some cases, paying a slightly higher down payment than you originally planned can substantially reduce PMI.
Example: If you put $29,000 (14.5%) down on a $200,000 home, your PMI would be around $4,300. If you bumped your down payment up to $30,000, your PMI drops to around $2,100.
You can experiment with HSH’s Down Payment DecisionerSM to help you better understand these tipping points and how to avoid PMI costs.
Is PMI Worth It?
For those with limited savings, PMI can be a welcome cost that helps them achieve home ownership earlier than they otherwise could. For others, it’s worth saving a 20% down payment to avoid.
“It’s all about trying to decide what the best allocation of your assets is,” says Gumbinger. If you have to cash out investments to put together a larger down payment, you could trigger a tax event and suffer lost opportunity costs. On the other hand, if you tend to spend your money, it might be better to tie your funds up into your house with a larger down payment that avoids PMI.
Every situation is different. Analyze your financial picture, run the numbers and decide for yourself whether PMI helps you achieve your goals.
