Private Mortgage Insurance (PMI): What First-Time Homebuyers Need to Know Before Putting Less Than 20% Down

Private Mortgage Insurance (PMI): What First-Time Homebuyers Need to Know Before Putting Less Than 20% Down

What Is Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is a type of insurance that protects the lender if the borrower defaults on their mortgage loan.

When a borrower puts down less than 20% of the purchase price, lenders consider the loan higher risk. PMI reduces that risk by covering a portion of the lender’s losses if the borrower stops making payments.

PMI is typically added to your monthly mortgage payment and can range from approximately 0.3% to 1.5% of the loan amount annually, depending on:

• your credit score
• your loan size
• your down payment
• your loan type

It’s important to understand this clearly:

👉 PMI does not protect you
👉 PMI does not build equity
👉 PMI is purely a cost of borrowing with less money down

 Real-Life

A first-time buyer finds the perfect home.

They’ve saved, they’re ready, and they’re approved.

But then they hear something that stops them in their tracks:

👉 “Because you’re putting less than 20% down, you’ll need to pay PMI.”

Suddenly, the monthly payment is higher than expected.
The deal feels different.

And the question becomes…

👉 Is PMI a mistake—or is it actually a tool?

In today’s housing market, where home prices remain elevated and interest rates have fluctuated, many first-time buyers are choosing to put less than 20% down—making PMI more common than ever.

 What You Need to Know Right Away

• PMI protects the lender—not you
• It increases your monthly payment
• It can be temporary or long-term depending on the loan
• It plays a direct role in how lenders manage foreclosure risk

How PMI Connects to Your Bigger Financial Picture

PMI is not a standalone decision. It connects directly to your: down payment, interest rate, affordability, closing costs and this is where most buyers get it wrong. They focus on avoiding PMI… instead of understanding how it fits into their overall strategy.

A Quick History of PMI (Why It Exists)

PMI became widely used after the mid-20th century as a way to expand access to homeownership. Before mortgage insurance, lenders required large down payments—often 20% to 30%—to reduce their risk. PMI was a tool that changed that and allowed more people to buy homes ~ the American Dream!

The Housing Market changed and became more dynamic and

• lenders to approve loans with smaller down payments
• more buyers to enter the housing market
• first-time homeownership to increase significantly

Today, PMI is a foundational part of the U.S. housing system, especially as affordability challenges have made large down payments more difficult for many buyers.

The Reality: Foreclosures Still Happen (And PMI Is Built for This)

This is where things get real—and where most buyers are never educated. Foreclosures are not just a historical event. They happen every single year.

Here are real numbers:

• 2020: ~0.16% of housing units (artificially low due to government protections during COVID)
• 2021: ~0.11% (lowest levels on record)
• 2022: ~248,000 foreclosure starts (~0.23%)
• 2023: increased from 2022 as markets normalized
• 2024: ~322,000 foreclosure filings (~0.23%)
• 2025: ~367,000 foreclosure filings
• 2025 increase: about +14% year-over-year
• 2026 (early): roughly 1 in every 3,547 homes had a foreclosure filing

Now compare that to history:

• 2008–2010 housing crisis: over 2 million foreclosures per year

What does this tell you?

👉 Foreclosures never disappear
👉 They rise and fall with economic pressure
👉 The system—including PMI—is built expecting them

 How PMI Works in a Default and Foreclosure

If a borrower defaults on their mortgage:

1. The lender begins the foreclosure process
2. The property is sold (often at a loss)
3. The lender files a claim with the PMI company
4. The PMI policy reimburses a portion of the loss

👉 PMI typically covers 15%–30% of the loan amount

That’s it.

👉 PMI protects the lender’s loss
👉 It does not protect your financial situation

Where Buyers Get Into Trouble (This Is Where Remorse Begins)

Here’s what most people don’t talk about:

Foreclosure rarely starts with
👉 “I can’t afford my mortgage.”

It usually starts with:

• no emergency reserves
• unexpected repairs (roof, heating system, plumbing)
• rising costs of ownership (insurance, taxes, maintenance)
• job or income disruption

In today’s environment, where ownership costs continue to rise, many first-time buyers underestimate what it truly costs to own a home beyond the mortgage payment.

This is where stress begins, This is where arguments begin, This is where regret begins.

👉 Not because of PMI itself
👉 But because the full financial picture wasn’t understood upfront

In foreclosure, you don’t just lose your down payment and all the expenses (moving, real estate agent fees) you also will have to find new housing (which costs money) and you lose the dream of home which can be gut wrenching.  Avoid these situations and learn how to connect all the grey areas for this process. Sure AI can give you a to do list – but whether or not it’s a good investment, how you negotiate, who represents you (Hint – it’s not your real estate agent) this is something you need to learn!

👉 Start here and find out how everything is connected Home Buying Chaos Unwrapped!

When PMI Can Be Removed (And When It Can’t)

Conventional Loans

• You can request removal at 20% equity
• It is automatically removed at 22% equity

PRO TIP >> You need to keep track of it on your Amortization Schedule.

FHA Loans

FHA loans use MIP (Mortgage Insurance Premium), not PMI.

• Less than 10% down → MIP lasts the life of the loan – read that again the LIFE of the loan
• More than 10% down → MIP lasts 11 years

👉 This is a major difference many buyers don’t understand

VA Loans

• No PMI
• Instead, there is a one-time funding fee (which is very expensive and almost as much as PMI)

Pros and Cons of PMI

Pros

• Allows you to buy with less than 20% down
• Helps you enter the market sooner
• Preserves cash for emergencies or opportunities
• Can be removed over time (conventional loans)

Cons

• Increases your monthly payment
• Does not build equity
• Can cost thousands over time
• May last longer than expected

Is PMI Tax Deductible?

Sometimes—but not reliably.

• PMI has been tax deductible in certain years
• Income limits apply
• Tax laws change frequently

👉 Do not base your decision to buy a home on whether or not you get a tax break – buy a home based on your life situation!

What to Think About When Considering PMI

This is where you shift from reacting… to thinking strategically.

1. Are You Buying Too Tight?

Do you have:

• 3–6 months of reserves?
• money for repairs? Most first time homebuyer are “surprised”, in general, with a 10k home repair they weren’t anticipating – and this is after the home inspection – and the closing. The truth is home have to be maintained and maintenance is a big deal! You need to budget for these line items. 
• flexibility in your budget?

A long, long time ago a friend of a friend said – set aside 10k per year for something for your house. At the time I thought that was ridiculous but honestly, looking back on it – it was sound advice because furnaces are expensive, decorating is expensive, roofs are expensive, home improvements are expensive. 

2. What Is Your Monthly Comfort Level?

Not what you qualify for.

👉 What you can live with comfortably.

3. What Is Your Exit Strategy?

• Will you remove PMI at 20% equity?
• Will you refinance later?
• Are you relying on appreciation?

This my friend, no one talks about – when you sell – this is where you really up the ante so to speak and you get ahead of the game – a lifetime of watching this field and seeing what happens in financial crashes, pandemics, loosing jobs, having babies, paying for college, buying cars – its fun! It’s a lot! It’s expensive and this is one small part of the grey are we discuss in The First Time Homebuyer Workshop! Come Join Us!

👉 Start Here “Homebuying Chaos Unwrapped!” (Free Mini-Class)
Inside, you’ll learn:
• Who does what in the homebuying process
• Who runs the homebuying process (Hint: It's not your real estate agent)
• Who helps you with the BIG picture (Hint: It's not the transaction specialists)

This class (40 min) will pull the wool from over your head so you can move forward with clarity—not confusion.

4. Are You Preserving Cash?

Cash = flexibility
Flexibility = stability

5. Do You Understand Your True Affordability?

PMI is just one piece.

👉 What does this home cost you every month—fully loaded?

Real Scenario

A buyer was determined to avoid PMI at all costs. They delayed buying for two years to save 20%.During that time: home prices increased, interest rates rose, their purchasing power decreased. In hindsight, paying PMI for a short period would have cost less than waiting.

 The Strategic Truth About PMI

PMI is not good or bad.

It is a tool.

Used correctly:
👉 it gives you access and flexibility

Used incorrectly:
👉 it creates pressure and financial risk

Final Thought

Foreclosures exist and the numbers prove it. And while PMI protects the lender in those situations… 👉 Your job is to protect yourself before you ever get there. Because buying a home isn’t just about getting approved. It’s about staying in control long after the deal is done.

👉 Start Here “Homebuying Chaos Unwrapped!” (Free Mini-Class)
Inside, you’ll learn:
• Who does what in the homebuying process
• Who runs the homebuying process (Hint: It's not your real estate agent)
• Who helps you with the BIG picture (Hint: It's not the transaction specialists)

This class (40 min) will pull the wool from over your head so you can move forward with clarity—not confusion.

 Questions?

What is PMI in simple terms?
PMI is insurance that protects the lender if you stop making mortgage payments.

When is PMI required?
When you put less than 20% down on a conventional loan.

Can PMI be removed?
Yes, typically at 20% equity.

Is PMI worth it?
It depends on your financial strategy and overall affordability.

Do all loans have PMI?
No, however most of the time the loan product just calls it something different so for practical purposes most loans do have some form of PMI. Technically VA loans do not. FHA loans use MIP, and VA loans include a funding fee that serves a similar purpose.

 Disclaimer: This content is intended to educate first time homebuyers and let you know there are options. Discussing the issues with the professionals you hire during your home buying journey is prudent. We are not recommending or advising you on your financial or legal situation

Let’s demolish homebuyer remorse together—one empowered buyer at a time.

 Julie Marion 

Founder of The First Time Homebuyer Workshop, homebuyer educator, Urban Planner, Freddie Mac Credit Counselor, Real Estate Broker, Podcast Host, You Tube Contributor.

www.TheFirstTimeHomebuyerWorkshop.com