If you’re a first-time homebuyer, you’re probably going to run into mortgage insurance, often called PMI. You typically pay mortgage insurance on most home loans if you make a down payment of less than 20% of the purchase price.
Though you can’t shop around for PMI for a mortgage like you would for homeowners insurance, you have options. Some of your choices regarding a home loan will significantly affect what you pay for PMI, so it’s important to know what those options are and have a basic understanding of mortgage insurance overall.
How Does PMI Work?
Private Mortgage Insurance (PMI) is a policy you pay for when your down payment on a conventional loan is under 20%. Its purpose is to protect the lender. If you ever default and your home goes into foreclosure, PMI helps cover the gap between what you owe and what the home sells for.
Although you’re the one paying the premiums, the coverage is for the lender’s benefit, reflecting the extra risk they take on when you put down less than 20%. Once you build at least 20% equity in your home, you can request to cancel PMI.
How Much is PMI?
Mortgage insurance rates for PMI vary according to several factors, primarily your credit score and the amount of your down payment. For most borrowers, mortgage insurance premiums will be an annual fee of around 0.4% to 0.5% of the original loan amount per year. However, borrowers with lower credit scores or very small down payments may have to pay PMI rates between 0.8% to 1.5%.
Additionally, PMI may be higher for loans over the conforming loan limit (jumbo loans), manufactured homes, second homes, investment property, and down payments less than 5%.
PMI vs. FHA Mortgage Insurance Premiums
FHA mortgage insurance, referred to as the FHA Mortgage Insurance Premium (MIP), works differently from PMI. With an FHA home loan, you pay an upfront premium of 1.75% of the loan amount at closing, then an annual fee collected monthly on your mortgage statement. Most borrowers pay an annual MIP of 0.55% of the loan balance.
That annual rate can rise to 1.05% on larger FHA jumbo loans, while it can fall as low as 0.15% on 15-year mortgages with substantial down payments.
Beyond the fee structure, there are two key differences between PMI and FHA MIP:
- Credit score independence: FHA MIP rates are set by loan size, term, and loan-to-value (LTV), while PMI rates are heavily reliant on your credit score.
- Cancellation rules:
- PMI can be dropped once you reach 20% home equity, either by paying down the loan or through appreciation (an appraisal may be required), and must end automatically when your LTV hits 78%.
- FHA MIP cannot be canceled on a 30-year loan if you put down less than 10%; you’ll pay it for the life of the loan. Even with a larger down payment, you’re stuck with MIP for at least 11 years. The only way to eliminate FHA insurance early is to refinance into a conventional mortgage once you’ve hit 20% equity.
VA and USDA Loan Fees
Mortgage insurance isn’t required for VA loans. However, VA loans have a one-time fee for certain borrowers known as the VA funding fee. The same is true for USDA Rural Development Loans, which are home loans for borrowers with low-to-moderate incomes who currently lack adequate housing.
Like FHA mortgage insurance premiums, the VA loan funding fee is influenced by your loan amount and loan-to-value. However, it is also impacted by the VA loan type and whether this is your first or subsequent use of the loan.
VA loans: For purchase loans in 2025, the fee tiers are:
- No down payment: 2.15% for first-time use; 3.30% for subsequent use
- 5%+ down payment: 1.50% for all uses
- 10%+ down payment: 1.25% for all uses
USDA loans: For all loan types, the USDA charges a 1.00% upfront guarantee fee plus a 0.35% annual fee (typically financed into your monthly payment).
Is PMI Tax-Deductible?
As of 2023, Private Mortgage Insurance (PMI) is no longer tax-deductible. This change applies to premiums paid after December 31, 2021.
Previously, the mortgage insurance deduction was available for eligible homeowners for the tax years 2018 through 2021, offering a financial benefit to those paying PMI. However, this deduction expired and is not applicable for the tax year 2022 and onwards, unless future tax guidelines reintroduce it.
What is Lender-Paid Mortgage Insurance?
A variation on PMI is lender-paid mortgage insurance or LMPI. In this case, the lender self-insures the loan by charging you a somewhat higher mortgage rate, usually a quarter to half a percentage point, rather than having you pay mortgage insurance premiums.
The big advantage of LPMI is that it’s tax-deductible since the cost is part of your mortgage rate, and you don’t have to worry about Congress extending it. The downside is that you can’t cancel it once you reach 20% equity; it’s a permanent feature of your loan that you can only get rid of by refinancing. However, it can be an attractive option for borrowers who expect to move again within a few years.
Sometimes, lenders will charge LPMI as a single fee at closing. In that case, you don’t get the tax deduction because it isn’t part of your mortgage rate.
Using a Piggyback Loan to Avoid PMI
You can sometimes avoid paying for PMI or FHA mortgage insurance using a piggyback loan. This type of second mortgage covers the difference between your down payment and 20%, so you don’t have to pay mortgage insurance premiums on the primary loan.
For example, if you put 5% down, you might take out a piggyback loan for another 15% to avoid paying PMI insurance on the primary loan. The interest rate on the piggyback will be higher than on the primary mortgage, but it’s still tax-deductible and may cost less than you’d pay in mortgage insurance premiums.
This arrangement was fairly common before the 2008 crash, but is rarely used or available, and only for borrowers with good credit.
Is PMI Worth It?
Some financial writers say you should avoid PMI/mortgage insurance and instead strive to make a 20% down payment. That works if you can find a more modest property to afford 20% down, but that’s rarely the case in the current housing market.
For many aspiring homeowners, it would take years to save up enough to put 20% down on any home, let alone a modest but decent one. Making a smaller down payment and paying for PMI/mortgage insurance allows you to own a home and start building equity now rather than paying that same money on rent.
Mortgage insurance can be a useful and cost-effective tool for realizing your goal of owning a home without depleting your savings or taking a decade or more to save up a large down payment. Knowing how it works and the choices available can help you decide just how much of a down payment you need and will help you narrow down your mortgage options.
