Private Mortgage Insurance (PMI) vs. Lender-Paid PMI: Which Saves More Money Over Time?

Mortgage rates have come down from recent highs but remain elevated. As of Oct. 2, the 30-year average mortgage rate stood at 6.34%, according to Freddie Mac.

And while housing supply has improved, many homeowners feel locked in by the lower rates they secured a few years ago. These factors, coupled with inflation, result in many buyers sitting on the sidelines.

For the ones who do feel ready to make the leap, having a 20% down payment can still be financially challenging. While smaller down payments are possible, it’s important to know that private mortgage insurance (PMI) could then be required, ballooning your monthly payments.

There are other options, such as “lender-paid PMI,” which folds the cost into the interest rate. But before jumping on either one of these policies, prospective buyers should understand there are key differences. 

What is private mortgage insurance (PMI)?

PMI is an insurance policy required by lenders if you don’t have a 20% down payment on a home. This is to protect lenders from potential defaults.

Hector Amendola, certified mortgage banker and president of Panorama Mortgage Group, explains that the cost typically ranges from about 0.5% to 1.8% of the loan amount per year, paid monthly. So, on a $350,000 loan, that works out to roughly $145 to $525 a month.

“The rate depends on your credit score, down payment, and the mortgage product. Its impact on affordability also varies with your interest rate, some borrowers feel it more than others, but for anyone required to have PMI, it does increase the monthly payment,” he said. “On the flip side, avoiding PMI requires a 20% down payment, a target that can be difficult for many first-time homebuyers to reach.”

And yet, for those homeowners who can manage a steady payment schedule, they can actually cancel PMI, which alleviates monthly charges.

Homeowners can remove the PMI “when you pay your loan balance down below 80% of the purchase price of your home, or once you have achieved 20% equity in your home," according to Fannie Mae.

What is lender-paid PMI?

Another option is LPMI, meaning that the lender pays the mortgage insurance premium if you don't have 20%. But there’s a catch.

Mark Reyes, CFP, founder and financial planner of Casita Financial Planning, explains that in exchange, the borrower receives a slightly higher interest rate on their mortgage, which may range from an additional 0.25% to 1.5%.

“Even though you won't see a separate PMI charge every month, the cost is actually rolled into the interest payments, which means they’ll pay more in total interest over the life of the loan,” he says.

Reyes noted that a key difference from regular PMI is that LPMI usually can't be canceled, even if 20% equity is achieved. The LPMI stays for the duration of the loan.

But it still might be a better option for you.

“If you can handle a slightly higher payment now, borrower-paid MI may be better since it automatically drops off once you reach 78% loan-to-value (22% equity), lowering your payment in the long run,” Amendola adds.

Pros and cons of PMI

Reyes explains that a significant advantage of PMI is that there’s a finish line for these additional payments, which is 20% equity.

“As the value of the house increases, PMI may end sooner than expected due to appreciation to 20% equity,” he says.

In addition, he notes that if you have a strong credit score, PMI may offer a low monthly payment and can also help you get into the housing market sooner than trying to save for a 20% down payment on a house that appreciates.

Sergio Altomare, co-founder and CEO of real estate private equity and development company Hearthfire Holdings, adds that, in essence, PMI functions as a short-term expense that helps you qualify for a mortgage today while avoiding elevated interest rates throughout your entire loan period.

As for drawbacks, Reyes says that this additional cost may impact monthly affordability, and if you have a poor credit score, PMI may be costly.

There are also tax considerations. Amendola explains that mortgage interest is tax-deductible for first-time homebuyers on loan amounts up to $750,000.

“However, since 2021, PMI has not been tax-deductible. While the One Big Beautiful Bill includes making PMI deductible (beginning in 2026), it's income-dependent,” he says.

Pros and cons of LPMI

According to Reyes, one of the big pros of LMPI is that if you have a strong credit score, it may not be as expensive as it would be for someone with a lower credit score.

In addition, if you plan to sell the house relatively quickly, the additional interest fees may not be as costly as PMI.

Amendola notes that mortgage interest is deductible regardless of income if you itemize deductions.

“So, beyond the lower initial payment, LPMI can offer an additional advantage through the built-in mortgage interest deduction,” he says.

One crucial disadvantage of LPMI is that the additional interest stays for the entire duration of the loan. If you end up keeping the house and keeping the original loan for the entire duration, you may end up paying more.

Comparing the math

According to Reyes, the cost of monthly PMI for a $350,000 loan with a 10% down payment, a 30-year fixed interest rate of 6.5%, and an 800 credit score would be approximately $145.83.

Let’s assume the house has appreciated to $400,000 in the first three years. The monthly mortgage payment would be $2,213, and the PMI payment would be $145.83, resulting in total monthly payments of $2,358.83. Total PMI payments for three years would amount to $5,249.88.

Beyond these years, let’s assume that the house has appreciated to $450,000. This would represent 25% equity. In this case, the PMI payment would be waived, leaving owners with only the mortgage payment. The total PMI cost would be $5,249.88.

In comparison, in the same scenario, and let’s assume a 30-year fixed interest rate with LPMI  amounting to 6.75%, monthly payments would total $2,271, including monthly LPMI of $58.32, resulting in a slightly lower monthly bill than with PMI. However, this sum would remain for the entirety of the loan, unless the owner chooses to refinance. In this scenario, the total cost of LPMI for the loan's lifetime would amount to $20,995.

Which option makes more sense?

According to the experts, one factor to consider when weighing these different options includes how long you plan to stay in the home.

Reyes says, generally speaking, if you can secure a low interest rate and plan on owning the property as your long-term or forever home, normal PMI might end up costing you less in payments compared to the additional interest that LPMI racks up.

“However, if you plan to sell the property in a short period—five years or fewer—LPMI might be a more attractive option, depending on the interest rate you secure. It’s best to consult with a financial advisor for your specific situation,” he adds.

Carl Holman, director of marketing at Foundation Mortgage, echoes the sentiment, saying that if you think you’ll be in the home long enough to build equity, borrower-paid PMI is almost always the better option, since you can eliminate it and enjoy a lower monthly payment going forward.

“The decision really comes down to time horizon—short-term borrowers may prefer the convenience of lender-paid PMI, while long-term buyers usually save more with borrower-paid PMI,” he explains.