PMI, or private mortgage insurance, is a monthly cost added to your mortgage payment when you put down less than 20% of the home's value on most conventional loans. It protects the lender, not you. The good news is that PMI is not permanent. It can be cancelled or removed under federal rules once you reach certain equity levels, and there are loan structures that change how it shows up in your budget.
This guide explains how PMI is priced, what it adds to a typical Arizona payment, when it comes off, and the options that trade a monthly insurance charge for something else. We will use a worked example so the numbers are concrete.
What is PMI and why does my lender require it?
Lenders take on more risk when they lend a larger share of a home's value. A buyer who puts 5% down and then stops paying leaves the lender with a loan that may be worth more than the house in a foreclosure. PMI is the insurance that covers part of that loss.
The 20% figure is a common threshold, not a law of physics. A loan with 80% loan-to-value, which means 20% down, usually avoids PMI entirely. Once you go below that, most conventional loans add the premium. FHA loans have their own mortgage insurance rules, and VA loans have a funding fee instead, so the details depend on the program you choose.
How much does PMI cost on a typical Arizona home?
PMI is usually quoted as an annual percentage of the loan amount. That annual figure is divided by 12 and added to your monthly payment. The rate moves with your credit score, your loan-to-value ratio, the loan term, and the insurance carrier's pricing at the time you close.
Here is a simple example. Suppose you buy a $400,000 home with 10% down. Your down payment is $40,000, and your loan is $360,000. If your PMI rate were 0.5% per year on the loan, the annual premium would be $1,800, or about $150 per month. [Illustrative only. Verify current PMI pricing with a Loan Estimate before publishing.]
That $150 is real money, but it is not the whole story. The bigger question is how long you will carry it and what it costs to avoid it.
How do you calculate PMI with the Three-Number Method?
We use a three-step check with buyers who are choosing between a smaller down payment and a larger one. We call it the Three-Number Method, and it keeps the comparison honest.
Number one: the monthly PMI. Ask for the PMI figure on your Loan Estimate. Do not estimate it from a rule of thumb if a lender can quote the real number.
Number two: the cash you would need to avoid it. In the example above, reaching 20% down on a $400,000 home means $80,000 instead of $40,000. The extra $40,000 has a cost too. If that money sits in savings earning a return, or if you would otherwise use it for repairs and moving costs, you are giving something up.
Number three: how long you will keep the loan. PMI is not forever. If you expect to refinance or move in three years, PMI may cost less than tying up a large down payment. If you plan to stay for a decade, the math may favor a bigger down payment or a removal strategy.
Run all three numbers for each scenario. The lower payment is not always the lower total cost.
When does PMI go away?
Federal rules on borrower-paid mortgage insurance set two main milestones on a standard residential loan. Your lender must follow these rules, but the details matter, so read your servicer's notices.
- You can request cancellation at 80% loan-to-value. Your loan balance must reach 80% of the home's original value, and you need a good payment history and no subordinate liens. Your lender may require a new appraisal in some situations.
- Automatic termination at 78%. If you have not requested cancellation, PMI must end when your scheduled balance reaches 78% of the original value, as long as you are current on payments.
- Midpoint termination. In most cases, PMI must end at the midpoint of the loan's amortization schedule, even if your balance has not reached 78%, provided you are current.
Home value changes can also help. Some lenders will consider a new appraisal if the property has appreciated, which can get you to 80% sooner. Ask your servicer how they handle this before you pay for an appraisal, because not every servicer accepts one.
Are there ways to avoid monthly PMI?
Yes. There are three common structures. Each has trade-offs, and none is automatically the right choice.
- Put 20% down. The simplest route. It removes PMI from the payment, but it requires more cash up front.
- Use a piggyback second loan. A second mortgage covers part of the down payment so the first loan stays at 80%. You avoid PMI but usually pay a separate interest rate on the second loan, and that payment must fit your budget.
- Choose lender-paid PMI. The lender pays the premium and recovers it through a higher interest rate. This can lower the monthly payment, but the rate usually stays for the life of the loan, unless you refinance.
The right answer depends on how long you keep the loan, what the rate difference is, and how much cash you want to keep after closing. We walk buyers through each option with their own numbers instead of choosing one for them.
Does PMI affect how much house I can afford?
It does. Lenders include the PMI payment in your debt-to-income calculation, which can lower the maximum loan amount you qualify for. A buyer who can comfortably afford a $3,000 total housing payment may find that the PMI pushes the number over the limit at a higher loan balance.
If you are still figuring out your range, start with our guide on how much house you can afford in Phoenix and then ask for a pre-qualification that includes PMI. That way the number you see reflects the full payment, not only principal and interest.
What should I ask my lender before closing?
Ask these questions on the first call, and get the answers in writing where you can:
- What is the exact monthly PMI on my Loan Estimate, and which carrier is it through?
- Is the PMI borrower-paid or lender-paid? If lender-paid, what is the rate difference?
- What balance do I need to reach to request cancellation, and what documents do you need from me?
- Do you accept a new appraisal for early cancellation, and what does it cost?
- If I refinance later, how would the PMI change?
A good loan officer should answer each of these without hesitation. If the answers are vague, ask again.
The bottom line on PMI
PMI is a cost of buying with a smaller down payment, and it is a cost with an end date. The buyers who handle it well know their PMI number, know the milestones for removal, and compare the full cost of each path. Once you have those numbers, the decision usually becomes clearer.
If you want to see how PMI fits your payment, use our mortgage calculator to test different down payments, then book a consultation and bring your target price. We will map the PMI and the removal timeline for your scenario.
Frequently asked questions
What is PMI and why do I have to pay it?
Private mortgage insurance protects the lender if you stop making payments. Most conventional loans require it when your down payment is less than 20% of the home's value. You pay it as a monthly add-on, and it does not protect you as the borrower.
How much does PMI cost?
PMI is usually a percentage of the loan amount each year, and the rate depends on your credit score, loan-to-value ratio, and loan term. The monthly cost is that annual figure divided by 12. Your Loan Estimate shows the exact amount.
When can I remove PMI from my mortgage?
You can request cancellation once your loan balance reaches 80% of the home's original value, if your payment history meets the requirements. PMI must end automatically when the balance is scheduled to reach 78%, provided you are current on payments.
Is PMI tax deductible?
Tax treatment of mortgage insurance premiums has changed over time and depends on your income and filing status. Confirm the current rules with a tax professional before you count on the deduction.
Is lender-paid PMI a better option than monthly PMI?
It depends on your timeline. Lender-paid PMI usually shows up as a higher interest rate, and that rate typically lasts for the life of the loan unless you refinance. Compare both scenarios over the years you expect to keep the loan.
About the author
Todd Uzzell is a licensed mortgage loan officer (NMLS #1525192) and a licensed Arizona real estate agent, working with buyers across the Phoenix and East Valley markets.