Key takeaways
- Twenty percent down isn’t a requirement. It’s the point where lenders stop charging private mortgage insurance (PMI) on a conventional loan.
- PMI typically costs about $30 to $70 a month per $100,000 borrowed, depending mostly on your credit score and down payment.
- PMI isn’t permanent. You can ask to cancel it at 80% loan-to-value, and it must end automatically at 78% of the original value.
- Waiting years to save 20% can cost more in rent and rising prices than PMI would. Run both paths before deciding.
The “20% down” rule is really a rule about mortgage insurance. Put less than 20% down on a conventional loan and your lender will almost always require private mortgage insurance. PMI protects the lender, not you, if you stop paying. Put 20% down and it disappears. That’s the whole rule. Plenty of buyers put down 3%, 5%, or 10% and pay PMI for a few years instead.
What PMI costs
Freddie Mac says borrowers typically pay about $30 to $70 a month for every $100,000 borrowed. Where you land in that range depends mainly on:
- Credit score. Higher scores get noticeably cheaper PMI.
- Down payment. 15% down costs less to insure than 5% down.
- Loan type and term. Some lenders price 15-year loans or certain programs differently.
On a $360,000 loan, that range works out to roughly $108 to $252 a month. It’s usually added to your monthly payment, though some lenders offer single-premium PMI paid at closing or “lender-paid” PMI built into a higher rate.
A worked example: 10% down vs. 20% down
Here’s a $400,000 home with a 30-year fixed rate of 6.5%, bought with 10% down and PMI of $180 a month, compared with 20% down and no PMI:
| 10% down | 20% down | |
|---|---|---|
| Down payment | $40,000 | $80,000 |
| Loan amount | $360,000 | $320,000 |
| Principal & interest | $2,275.44 | $2,022.62 |
| PMI | $180 a month | $0 |
| PMI ends automatically after | 9 years and 1 month | — |
| Total PMI paid | $19,620 | $0 |
So the extra $40,000 of down payment saves about $19,620 of PMI, plus the interest on the larger loan. That’s real money. But if saving that extra $40,000 would take you three or four more years of renting, the trade-off looks very different.
When PMI goes away
For conventional loans on a primary residence closed on or after July 29, 1999, the Homeowners Protection Act gives you three ways out:
- Request cancellation at 80%. Once your balance reaches 80% of the home’s original value (the lower of the purchase price or appraised value), you can ask your servicer in writing to cancel PMI. You generally need a good payment history, no second mortgage, and possibly proof that the home hasn’t lost value. In the example, that’s after 95 payments on the regular schedule, about 7 years and 11 months in.
- Automatic termination at 78%. When your balance is scheduled to reach 78% of the original value, PMI must end automatically if you’re current on payments. In the example that’s 9 years and 1 month in.
- Final termination at the midpoint. Even if neither threshold is reached (for example, on an interest-only loan), PMI must end the month after the loan’s midpoint: 15 years into a 30-year mortgage.
The 80% request is based on your actual balance, so prepaying counts. Adding $300 a month to the example loan brings the balance to 80% of the original value after 56 payments (4 years and 8 months) instead of 95. The 78% automatic cutoff is based on the original schedule, so to benefit from prepaying you have to ask.
Rising home values can also help, but not automatically. The federal 80% and 78% rules use the original value. Many servicers will cancel PMI based on a new appraisal if the loan is old enough and your loan-to-value ratio is low enough, often 75% or 80% depending on how long you’ve had the loan. You’ll usually pay for the appraisal, so ask for the requirements before ordering one.
Should you wait until you have 20% down?
It depends on how long waiting takes and what happens in the meantime. Waiting makes sense when:
- You’re close. If one more year of saving gets you to 20%, the PMI savings may be worth it.
- Your credit score is on the low end, so your PMI quote is expensive. Improving your credit for a few months can cut the premium substantially.
- Putting less down would leave you without an emergency fund. Never drain your savings to buy a house.
Buying sooner with PMI can make sense when:
- Saving 20% would take years, and you’d pay rent the whole time.
- You’d rather keep cash for repairs, moving, and an emergency cushion. A new homeowner with no cash reserves is a bigger risk than a few years of PMI.
- You plan to make extra payments to get to 80% loan-to-value quickly and then request cancellation.
There’s no universal answer, but there is a way to see yours: run both scenarios in the mortgage calculator, and use the rent vs. buy calculator to account for the rent you’d pay while you save.
Alternatives to PMI
- FHA loans have their own mortgage insurance that often lasts for the life of the loan. They can still be the better deal with a lower credit score. See FHA vs. conventional.
- VA loans for eligible service members and veterans charge no monthly mortgage insurance (there’s a one-time funding fee, which some borrowers are exempt from).
- USDA loans for eligible rural areas have their own guarantee fees.
- Lender-paid PMI trades a monthly premium for a higher interest rate for the life of the loan, and it can’t be canceled. It can make sense if you expect to sell or refinance within a few years.
- “Piggyback” loans (for example, 80/10/10) avoid PMI with a second mortgage, usually at a higher rate. Compare the full cost carefully.