If you’re buying a home with less than 20% down on a conventional loan, you’ll likely be required to carry private mortgage insurance (PMI). PMI protects the lender — not you — in the event of default. But understanding how PMI works, and which payment structure makes the most sense for your situation, can help you manage costs and make a smarter financing decision.
This guide covers how PMI is calculated, the four main ways to pay for it, and how to cancel it once you’ve built enough equity. If you’re buying or refinancing a home in Washington State, I can help you compare options for your specific scenario.
What Is Private Mortgage Insurance?
Private mortgage insurance is required by lenders on conventional loans when the borrower’s down payment — or equity in a refinance — is less than 20% of the home’s value. This puts the loan-to-value (LTV) ratio above 80%, which represents greater risk to the lender.
Important: PMI protects the lender, not the homeowner. If you fall behind on payments, PMI will not prevent foreclosure or reduce what you owe.
How Much Does PMI Cost?
PMI premiums are risk-based, meaning the cost is influenced by several factors about the borrower and the loan. Generally, PMI costs between 0.2% and 2% of the loan amount per year, with most borrowers landing in the 0.5%–1% range.
Factors that affect your PMI rate:
- Credit score (higher scores = lower PMI)
- Loan-to-value ratio (the closer to 80%, the lower the premium)
- Loan type: fixed-rate vs. adjustable-rate mortgage (ARMs typically cost more)
- Down payment amount
- Occupancy type (primary residence, second home, investment)
- Self-employment status
- Prior bankruptcy or foreclosure
- Property location
Credit score example: A borrower with a 760+ score might pay as little as 0.46% annually, while a borrower with a 620–639 score could pay up to 1.5% of the loan amount.
The Four PMI Payment Options
Most lenders offer multiple ways to pay for PMI. Here’s a side-by-side comparison:
| PMI Type | How It’s Paid | Monthly Payment Impact | Cancellable? | Best For |
|---|---|---|---|---|
| Monthly (BPMI) | Added to mortgage payment each month | Higher monthly payment | Yes — at 20% equity | Buyers preserving cash at closing |
| Single Premium (SPMI) | One lump sum at closing or financed into loan | Lower monthly payment | Partial refund possible if paid upfront | Buyers with cash reserves or seller credit |
| Split Premium | Upfront portion + reduced monthly amount | Lower monthly than BPMI | Monthly portion is cancellable | Buyers who want lower monthly without full upfront cost |
| Lender-Paid (LPMI) | Lender pays; you accept higher interest rate | No separate PMI line item | No — must refinance to remove | Buyers in short-term ownership scenarios |
Monthly PMI (Borrower-Paid, BPMI)
The most common PMI structure. The premium is added to your monthly mortgage payment and continues until you reach 20% equity.
Pros: No upfront cost. Can be cancelled when equity reaches 20%.
Cons: Increases your monthly payment. Requires active monitoring to request cancellation.
Cancellation: You may request cancellation once your balance drops to 80% of the original value. Federal law (the Homeowners Protection Act) requires automatic cancellation at 78% LTV based on the original amortization schedule.
Single Premium PMI (SPMI)
You pay the entire PMI cost upfront at closing, either in cash or by financing it into the loan. This eliminates the monthly PMI payment entirely.
Pros: Lower monthly payment. The premium can be paid by the seller as a closing cost concession, or offset with lender rebate pricing.
Cons: Requires cash at closing (or a larger loan balance if financed). If you sell or refinance before reaching 20% equity, you may not recoup the prepaid premium — refundable options exist but vary by insurer.
Split Premium PMI
A hybrid structure that combines a partial upfront payment with a reduced monthly premium. The larger the upfront payment, the lower the monthly portion — and vice versa.
Pros: Reduces the monthly payment compared to standard BPMI without requiring the full upfront cost of SPMI. The monthly portion is cancellable. The upfront portion can be paid by seller concession or lender credit.
Cons: Requires some cash at closing. If you move or refinance quickly, the upfront portion may not have generated full value.
Lender-Paid PMI (LPMI)
The lender pays the PMI premium upfront, but recovers the cost by charging you a higher interest rate. There’s no monthly PMI line item — but you pay more in interest for the life of the loan.
Pros: Simpler payment — no separate PMI. Lower payment in early years compared to BPMI in some scenarios.
Cons: The higher interest rate is permanent and cannot be cancelled the way borrower-paid PMI can be. The only way to eliminate it is to refinance.
LPMI may appear attractive upfront but can cost significantly more over time, especially if you stay in the home long-term.
Real-World Scenario: 10% Down in King County
Using a $600,000 purchase price with 10% down ($60,000), resulting in a loan amount of $540,000, with a 740+ credit score and DTI below 45%, here’s how the PMI options compare:
| PMI Structure | Upfront Cost | Estimated Monthly PMI | Notes |
|---|---|---|---|
| Monthly (BPMI) | $0 | ~$216–$270/mo | Based on ~0.48%–0.60% annual rate |
| Single Premium (SPMI) | ~$6,318 (1.17%) | $0/mo | Seller or lender credit may cover this |
| Split Premium | ~$2,700 (0.50%) | ~$70–$90/mo | Upfront reduces monthly significantly |
| Lender-Paid (LPMI) | $0 | No PMI line item | Rate increases; cannot cancel without refi |
PMI vs. FHA Mortgage Insurance: Which Costs Less?
For borrowers who qualify for either a conventional loan with PMI or an FHA loan, the cost comparison has shifted considerably. FHA loans require both an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount AND an ongoing annual MIP for the life of the loan in most cases. Conventional loans with PMI can be cancelled once you reach 20% equity.
In most scenarios where a borrower has a 640+ credit score and 3.5%–10% down, a conventional loan with PMI will be more cost-effective than FHA over the long term. Your specific numbers may vary — I can run a side-by-side comparison for your situation.
Frequently Asked Questions About PMI
Can I cancel PMI on a conventional loan?
Yes. You can request cancellation once your loan balance reaches 80% of the home’s original value. Your lender is required by federal law to automatically cancel it at 78% LTV. If your home has appreciated significantly, you may be able to request early cancellation with a new appraisal.
Can the seller pay for my PMI?
Yes — with single premium or split premium PMI structures, the upfront cost can be paid as a seller concession or offset by lender rebate pricing. This is a useful strategy in purchase transactions.
Is PMI tax deductible?
PMI deductibility has varied under federal tax law. Consult a tax advisor for current rules applicable to your situation.
Does PMI apply to jumbo loans?
It depends on the lender and loan structure. Some jumbo loan programs have built-in mortgage insurance; others don’t require it. Portfolio lenders may structure jumbo loans differently. I can walk you through your specific jumbo options in Washington State.
What if I put down 15% instead of 10%?
A higher down payment reduces both your loan amount and your PMI rate, since it lowers the LTV ratio. At 15% down (85% LTV), PMI premiums are noticeably lower than at 10% down (90% LTV). A piggyback second mortgage (80/10/10 or 80/15/5) is another strategy to consider.
How do I know which PMI option is right for me?
It depends on how long you plan to stay, how much cash you have at closing, and whether you’ll have seller credits available. I run detailed cost comparisons for my clients — the right structure varies by situation.
Ready to Compare Your PMI Options?
If you’re buying or refinancing a home anywhere in Washington State — whether in Seattle, Bellevue, Redmond, or the greater Puget Sound area — I can help you model the real cost of each PMI structure for your specific scenario.
Every buyer’s situation is different. The goal is to find the structure that minimizes your total cost while preserving the flexibility you need.
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About Rhonda Porter
Great article. I didn’t realize PMI would automatically terminate. Thanks, Rhonda!
Thanks, Christy. I still would not rely on the termination of the PMI 100%. Always look out for your own financial best interest.
I had a friend who’s PMI was actually reinstated–I have a link to that article at the bottom of this post.