If you put down less than 20% on a conventional mortgage, you’ll pay Private Mortgage Insurance. PMI protects the lender if you default. It does nothing for you except cost money every month.
What PMI Costs
PMI rates depend on your credit score and loan-to-value (LTV) ratio. Annual PMI as a percentage of the loan amount:
| Credit Score | 95% LTV (5% down) | 90% LTV (10% down) | 85% LTV (15% down) |
|---|---|---|---|
| 760+ | 0.40% | 0.25% | 0.15% |
| 720-759 | 0.55% | 0.35% | 0.20% |
| 680-719 | 0.85% | 0.55% | 0.35% |
| 640-679 | 1.25% | 0.85% | 0.55% |
| Below 640 | 1.50%+ | 1.10%+ | 0.75%+ |
On a $380,000 loan (5% down on $400,000), a buyer with a 720 credit score pays 0.55% = $2,090/year or $174/month.
A buyer with a 660 score on the same loan pays 1.25% = $4,750/year or $396/month. Over five years, that’s $23,750.
Types of PMI
Borrower-paid monthly PMI: Most common. Added to your monthly payment. Cancellable when you reach 20% equity.
Lender-paid PMI (LPMI): The lender pays PMI in exchange for a slightly higher interest rate. The rate increase is permanent and cannot be removed even at 20% equity.
Single-premium PMI: Pay the entire PMI amount upfront at closing ($5,000-$10,000+). Useful if you plan to stay long enough to break even vs. monthly PMI.
FHA Mortgage Insurance Premium (MIP): Not technically PMI but serves the same purpose. FHA MIP is 0.55% annually (for most loans) plus 1.75% upfront. The critical difference: FHA MIP cannot be canceled if you put down less than 10%. It stays for the life of the loan.
When PMI Gets Cancelled
For conventional loans, PMI removal works in two ways:
- Automatic cancellation: The lender must cancel PMI when your loan balance reaches 78% of the original home value (not current value)
- Requested cancellation: You can request cancellation at 80% LTV. You’ll need a good payment history and may need a new appraisal if you’re relying on appreciation.
On a $380,000 loan amortizing at 6.8%, reaching 78% of original value ($312,000) takes approximately 9 years through payments alone.
If the home appreciates, you can request an appraisal and potentially cancel sooner. A 10% increase in value to $440,000 with a $370,000 balance would put you at 84% LTV of current value, which most lenders will consider.
The Math: 5% Down vs. 20% Down
Should you wait to save 20% or buy now with PMI?
5% down on $400,000 home:
- Down payment: $20,000
- PMI: ~$174/month for approximately 7 years = $14,616
- Higher loan amount means more interest: approximately $28,000 more over 30 years
20% down on $400,000 home:
- Down payment: $80,000
- PMI: $0
- Total savings: ~$42,000
But saving the additional $60,000 takes time. If home prices appreciate 3% per year while you save, the home costs $424,000 in 2 years and $449,000 in 3 years. The price increase may exceed the PMI cost you were trying to avoid.
There’s no universally right answer. Run the numbers for your specific timeline and market.
Use the HomeStats affordability calculator to compare scenarios with different down payments.
For the complete breakdown of every purchase cost and how they compound over time, read The Resale Trap.