When You Pay It, When You Don't

Understanding when you must pay Private Mortgage Insurance (PMI) is a key part of real estate finance. PMI is an extra monthly cost that applies to many homebuyers, but not all. Whether you pay PMI depends on your loan-to-value (LTV) ratio, which is the percentage of your home's value that you are borrowing. Most lenders require PMI if your down payment is less than 20% of the home's purchase price, meaning your LTV is above 80%. This insurance protects the lender, not you, if you default on the loan. As a result, PMI increases your monthly mortgage payment until you reach certain equity thresholds.

Suppose you are buying a $300,000 house. With a 10% down payment ($30,000), your loan amount is $270,000, making your LTV 90%. In this case, PMI is required. If your monthly mortgage payment (principal and interest) is $1,500 and PMI costs 0.5% of the loan amount per year, your annual PMI is $1,350 ($270,000 x 0.005). Dividing by 12, PMI adds $112.50 to your monthly payment, bringing your total to $1,612.50.

If you put 20% down ($60,000), your loan amount is $240,000 (LTV 80%), and PMI is not required. Your monthly payment might drop to $1,350 (since you borrowed less and have no PMI). This shows how PMI can significantly impact your housing costs until you build enough equity to cancel it.