PMI, Explained (and How to Drop It)

You're going through your mortgage paperwork and there it is: an extra charge called PMI, quietly adding to your monthly payment. Before you assume you're being nickel-and-dimed, know that it's a normal, understandable thing with a real purpose, and it doesn't have to stick around forever.

PMI stands for private mortgage insurance. When you put down less than 20%, the lender is taking on more risk, since you have less of your own money in the home. PMI is insurance you pay for that protects the lender if you stop making payments. That sounds backwards, but it's the very thing that makes small-down-payment loans possible.

PMI is the trade that lets you buy now with a smaller down payment instead of renting for years while you scrape together 20%. It's the price of getting in the door sooner.

PMI is usually a monthly amount baked into your mortgage payment, and the cost depends on your down payment, your loan, and your credit, so it varies. On a $250,000 home, it might run somewhere in the range of $50 to $200 a month. Not nothing. But it's also temporary, which is the whole point of what comes next.

On many loans, you can get rid of PMI once you've built up enough equity, meaning the slice of the home you actually own. You build equity two ways: by paying down your mortgage, and as the home's value rises over time.

1. 1Once you've paid your balance down to around 80% of the home's value, you can usually request that PMI be removed.
2. 2On many loans, PMI also drops automatically once your balance reaches about 78% of the original value.
3. 3Paying a little extra toward your principal each month gets you there faster.
4. 4If your home's value has jumped, an appraisal may show you've already hit the mark. Ask your lender.

Treat PMI as a temporary toll, not a permanent fee. It lets you start building wealth in a home now, and once you've built enough equity, you can shed it and keep that money.