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You’ve gotten approved for a mortgage. There’s excitement. Relief. Then an unfamiliar line in the paperwork stops you. A PMI mortgage charge.

Private mortgage insurance is a monthly fee that’s added if your down payment is less than 20% of the home’s purchase price. Let’s consider what you need to know about PMI.

PMI covers risk. When a homebuyer puts down less than 20%, a considerable share of the home’s value gets financed. Statistically, that raises the chance of default. In the event the loan goes unpaid and foreclosure doesn’t cover the loan balance, PMI pays the difference to the mortgage professional handling your financing.

Generally, PMI only applies to conventional loans. Other loan types handle insurance differently. FHA loans, for example, require a mortgage insurance premium (MIP) with its own rules and cost structure.

In most cases involving a mortgage and PMI, 80% is the key number. If your loan-to-value ratio (LTV) – what you owe compared to the home’s value – is 80% or below, PMI typically isn’t required. In other words, no PMI if you have at least 20% equity.

In most cases, the mortgage professional arranges PMI through a private provider. The total PMI cost is divided by 12 and added to your monthly mortgage payment.

PMI generally costs between 0.5% and 1.5% of your loan amount. Your rate is often determined by the loan type and your financial profile.

Here is what an average case might look like. With a $300,000 loan at a 1% annual rate, about $250 gets added to the monthly mortgage payment. This can be a significant addition to your housing budget and one worth planning for.

The rate matters considerably. Take the $300,000 loan example. At a 0.5% annual rate, about $125 gets added to your monthly mortgage payment. At a 1.5% annual rate, about $375 gets added.

Several factors affect the rate you receive:

• Down payment: A larger down payment usually means lower PMI rates.
• Credit score: A strong credit profile may help you qualify for a lower PMI rate.
• Loan type: Fixed-rate mortgages often have lower PMI costs than adjustable-rate mortgages.
• Loan-to-value ratio: The more equity you have, the lower the coverage costs may be.

PMI typically falls into one of two categories:

• Borrower-paid PMI: In this most common scenario, the premium is added directly to your monthly mortgage payment.
• Lender-paid PMI: In some cases, the mortgage professional pays the PMI cost in exchange for a higher interest rate. You generally can’t cancel lender-paid PMI when you reach 20% home equity. This strategy makes the most sense if you only plan to stay in the home for a few years.

In both cases, the mortgage professional chooses the insurance provider.

With conventional mortgages, there are typically two ways to avoid PMI:

• Put 20% down: With a down payment of 20% or more, you pass the home-equity threshold, eliminating the PMI requirement.
• A piggyback loan: Here, a first mortgage covers 80% of the home’s purchase price. The remaining 20% is split between a second mortgage and your down payment. Most piggyback loans have an 80-10-10 structure – 80% first mortgage, 10% second mortgage, and 10% down payment.

Unlike conventional mortgages, which use private mortgage insurance (PMI), FHA loans require MIP (Mortgage Insurance Premium). MIP is added directly to your monthly payment.

MIP also comes with a one-time upfront fee. It is typically 1.75% of the loan amount and often rolled into the total mortgage balance.

Overall, the cost of MIP generally ranges from 0.55% to 0.75% of the loan amount for standard 30-year mortgages. Take our example of a $300,000 loan. The upfront fee adds $5,250 to the balance. MIP at an annual rate of 0.55% would add about $140 to the monthly payment.

How many years until PMI goes away on an FHA loan? If you put down less than 10%, MIP lasts for the life of the loan. If you put down 10% or more, MIP ends after 11 years.

When the loan balance reaches 80% of the home’s original value, borrowers can request PMI be cancelled. Home appreciation and a new appraisal showing that the home’s value has increased can make that happen faster.

*Refinancing could eliminate PMI. A new mortgage with a loan-to-value ratio of 80% or lower would not need PMI. However, this may only make financial sense if the refinancing costs are lower than the PMI costs.

Keep one important exception in mind: Lender-paid PMI can never be cancelled.

If you can’t comfortably make a 20% down payment, paying PMI is usually the smarter move. In markets where home prices are rising and interest rates are creeping up, buying before you reach 20% lets you start building home equity sooner. You don’t want to exhaust your savings and end up with insufficient reserves for emergencies, repairs, or other expenses just to avoid PMI.

Avoiding PMI might make sense with a piggyback loan. If the math works out, the combined costs of a first and a second mortgage could be lower than PMI payments.

The key is comparing the total costs over the life of the loan – not which option lowers monthly payments.

*Refinancing Disclaimer: When it comes to refinancing your home loan, you can generally reduce your monthly payment amount. However, your total finance charges may be greater over the life of your loan.