You've Been Warned: Mortgage Insurance Could Cost You A Ton Of Money

Home insurance costs have jumped 24% from 2021 to 2024 — the average homeowner paid $3,303 a year for coverage, according to the Consumer Federation of America. But there's another insurance cost that catches a lot of homeowners off guard: private mortgage insurance (PMI). The National Association of Realtors found that the median down payment was 18% in 2024. First-time buyers only put down 9%. That means most people buying homes end up paying PMI because they can't hit that 20% down payment mark.

PMI isn't cheap. According to Zillow, it usually runs between 0.58% and 1.85% of your original loan amount each year. Freddie Mac explains in its MyHome guide — most people pay $30 to $70 a month for every $100,000 they borrow. That adds up fast and can really drive up your monthly payment, making it crucial to explore ways to lower your mortgage payment. Many first-time buyers don't realize just how much PMI will cost them. Over several years, those payments can easily total five figures — money that could have gone toward your equity or other goals.

PMI costs are straightforward to calculate. You multiply your loan amount by the PMI rate, then divide by 12 for the monthly payment. Say you've got a $400,000 mortgage with a 1% PMI rate. That's $4,000 a year, or about $333 tacked onto your monthly payment. Over five years, you're looking at $20,000 spent on insurance that only protects the lender—not you.

Your credit score directly affects what you pay through risk-based pricing. The Illinois Federal Credit Union breaks it down: borrowers with "very good" credit scores of 740 or higher might pay 0.20% to 0.30% of their loan balance each year. Those with "fair" credit scores between 620-660 could face rates of 0.75% to 1.5%. Lower credit scores mean you pay way more for PMI. Take a $300,000 mortgage for example — the gap between excellent and fair credit can cost you an extra $150 to $200 a month in PMI premiums.

How long you pay those charges depends on your loan-to-value ratio (LTV). The federal Homeowners Protection Act obliges servicers to drop PMI automatically when your loan amount shrinks to 78% original value of your home, according to the Consumer Financial Protection Bureau. You can also request cancellation once your principal balance drops to 80% of the original value. Until you reach the 78% LTV threshold, you're required to pay PMI each month — money that might have been better spent to pay off debt earlier or save up for retirement.

The Consumer Financial Protection Bureau's 2025 guide on PMI cancellation says you can request removal once your principal balance drops to 80% of the home's original value. You need to be current on payments and have no junior liens (like second mortgages or home equity loans). That's why getting a home equity loan might not be the best idea. To get it removed early, send a written cancellation request with proof of your loan balance and a statement saying you don't have any subordinate mortgages. Federal law requires your servicer to honor that request.

You can also refinance if your home's value went up or market rates dropped. Freddie Mac's 2021 Private Mortgage Insurance Handbook explains that if a new appraisal gets your loan-to-value ratio down to 80% or less, you can refinance into a conventional loan without PMI. This works best when home values are rising — effectively lowering your mortgage payments.

Some insurers let you cancel based on what your home is worth now. Movement Mortgage's 2023 PMI Removal Guide says most lenders make you wait two years before they'll order an appraisal for appreciation-based removal. The LTV thresholds depend on the investor. Usually it's 75% for loans that are 2–5 years old and 80% for loans over five years. Appraisal fees run $150 to $400, but an updated valuation can eliminate months or years of PMI payments right away. That frees up cash for savings, investments, or home improvements.