Private mortgage insurance is a charge lenders add to a conventional mortgage when the borrower puts down less than 20% of the purchase price. It insures the lender, not you, against the risk that a low-equity loan goes bad. It typically costs 0.3% to 1.5% of the loan amount per year, folded into the monthly payment.
On a $450,000 home with 10% down, the loan is $405,000. At a PMI rate of 0.6%, that is about $2,430 a year, or $203 a month, on top of principal, interest, taxes, and insurance. The rate depends on credit score and down payment size; a 760 score with 15% down pays far less than a 660 score with 5% down.
PMI is temporary. By law, you can request cancellation once the loan balance falls to 80% of the original value, and the lender must cancel it automatically at 78%. If the home has appreciated, an appraisal can get you there sooner. FHA loans work differently: their mortgage insurance often lasts the life of the loan unless you refinance.
Whether to pay PMI or wait for 20% is a real trade-off. Waiting two years to save another $45,000 while prices and rents rise can cost more than two years of PMI. Buying sooner with PMI is often reasonable if the payment is comfortable.
The common mistake is forgetting to ask for removal. Lenders do not always cancel promptly at 80%, and paying an extra $200 a month for a year through inattention is $2,400 gone.