Why PMI Is the Hidden Tax You Pay for Your Dream Home

Private Mortgage Insurance (PMI) is a fee you pay when your down payment on a home is less than 20%. It’s a shield for the lender, not you, covering their risk if you default. It’s a monthly cost that can drag on, chipping away at your budget. Let’s cut to the chase.

The Breakdown

PMI runs about 0.5% to 1.5% of your loan amount annually, or roughly $40–$125 per month per $100,000 borrowed. For a $300,000 mortgage, that’s $1,500–$4,500 a year, or $125–$375 a month. Costs depend on loan size, credit score, and down payment—smaller down payments or weaker credit jack up the rate. The Urban Institute notes PMI can add thousands to homeownership costs over time.

PMI applies to conventional loans with less than 20% down. FHA loans use Mortgage Insurance Premiums (MIP) instead, with an upfront fee and annual charges. MIP sticks for the life of the loan unless you put down at least 10%, then it drops after 11 years. PMI gained traction in the late 1950s—MGIC’s 1957 launch was a key moment—to help conventional lenders rival FHA and VA loans. (VA loans, by the way, skip PMI entirely.)

Example: Buy a $400,000 home with 10% down ($40,000). You borrow $360,000, and PMI at 1% costs $3,600 a year ($300/month). That’s piled on top of principal, interest, taxes, and insurance. Five years to reach 20% equity? That’s $18,000 in PMI—money that doesn’t build your wealth.

For conventional loans, you can request PMI removal at 80% loan-to-value (LTV) ratio (20% equity). It automatically terminates at 78% LTV under the Homeowners Protection Act—no request needed.

The Takeaway

PMI is a pricey toll for low down payments. Save up for 20% down or pick a home you can afford outright. If you’re stuck with PMI, pay extra toward principal to hit 80% LTV faster and kill it early. Monitor your equity and check with your lender—don’t let PMI linger.

The Closer

PMI is what you pay for rushing the dream. Save more, or you’re just funding your lender’s safety net.

Disclaimer: This is not financial advice. Consult a professional before making homebuying or investment decisions. For more insights, subscribe to my newsletter. Explore PMI options with your lender/servicer tools.