---
title: PMI (private mortgage insurance) — what it means and why it matters | Allocate AI
description: A monthly fee added to a mortgage when your down payment is under 20%, protecting the lender if you default; it can be removed once you reach 20% equity.
canonical: https://allocateai.io/glossary/pmi
site: Allocate AI — https://allocateai.io
---

# PMI (private mortgage insurance)

A monthly fee added to a mortgage when your down payment is under 20%, protecting the lender if you default; it can be removed once you reach 20% equity.

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.

[Try the Rent vs. Buy Calculator →](https://allocateai.io/calculators/rent-vs-buy)

## Related terms

- [Escrow (mortgage escrow account)](https://allocateai.io/glossary/escrow) — An account your lender runs to collect property tax and homeowners insurance as part of your monthly payment, then pays those bills for you.
- [Closing costs](https://allocateai.io/glossary/closing-costs) — The fees paid to finish a home purchase or refinance, typically 2% to 5% of the loan amount, covering the lender, title, appraisal, and prepaid items.
- [Rent vs buy break-even](https://allocateai.io/glossary/rent-vs-buy-break-even) — The number of years you would need to stay in a home for buying to come out ahead of renting, once closing costs, upkeep, and investment returns are counted.
- [Refinance](https://allocateai.io/glossary/refinance) — Replacing an existing mortgage with a new one, usually to get a lower rate, change the term, or pull out cash from home equity.

**Plan in plain language.**

Allocate answers “can I afford this?” from your own numbers, writes the plan, and stages every change for your yes. It starts from an estimate before you link a bank.

[Get started](https://app.allocateai.io/signup)

---

Allocate AI is a budgeting and financial-planning app: link your accounts, say what you want in plain words, and it writes the plan and stages every change for your approval. Read more at https://allocateai.io or see all pages in https://allocateai.io/llms.txt.