Why a Smaller Down Payment Costs You Every Month
Private Mortgage Insurance exists to protect the lender โ not you โ when your down payment is less than 20% of the home's price. That gap creates a loan-to-value (LTV) ratio above 80%, which most conventional lenders consider higher risk, so they require PMI to offset it. PMI is charged as an annual percentage of your loan amount, split into a monthly premium added right on top of your mortgage payment. The exact rate depends on your credit score, down payment size, and loan type, but it commonly falls between 0.3% and 1.5% per year. The good news is PMI isn't permanent: once your loan balance drops to 80% of your home's original value, you can request cancellation, and by law it must be automatically removed at 78%. Making extra principal payments early can help you shed PMI faster and start keeping that monthly cost in your own pocket.
How It's Calculated
| Step | Item | Formula |
|---|---|---|
| 1 | Loan Amount | Home Price ร (1 โ Down Payment %) |
| 2 | LTV Ratio | Loan Amount รท Home Price ร 100 |
| 3 | Annual PMI | Loan Amount ร PMI Rate (only if LTV > 80%) |
| 4 | Monthly PMI | Annual PMI รท 12 |
Frequently Asked Questions
PMI is typically required when your down payment is under 20%, putting your LTV above 80%. It protects the lender, not you, if you default.
It's charged as an annual percentage of your loan amount, split monthly, commonly ranging from 0.3% to 1.5% per year.
You can request removal at 80% LTV, and it's automatically removed at 78% under federal law for most conventional loans.
โป Actual PMI rates vary by lender, credit score, and loan program. This is a simplified estimate for reference only.