Private Mortgage Insurance (PMI) and mortgage points can seriously impact your monthly payments and long-term costs. PMI adds to your payment if you put down less than 20%, while mortgage points let you pay more upfront to lower your interest rate. Knowing when they’re worth it can save you thousands.
What Is PMI?
Private Mortgage Insurance (PMI) is a lender-required insurance policy that protects them—not you—if you default on your loan. It’s typically required when your down payment is less than 20%.
How Much Does PMI Cost?
- Usually 0.5%–1% of your loan amount per year.
- Paid monthly, rolled into your mortgage payment.
- Example: On a $300,000 loan, PMI could cost $125–$250/month.
When Can You Stop Paying PMI?
- PMI is typically removed automatically once your loan-to-value ratio (LTV) hits 78%.
- You can request to cancel it earlier (at 80% LTV) if your home has appreciated or you’ve paid down the loan faster.
- Refinancing may also help you remove PMI if your home’s value has increased.
Is PMI Always Bad?
No. It allows you to:
- Buy a home sooner without waiting to save 20%.
- Start building equity instead of paying rent.
- Enter rising markets where home prices are increasing rapidly.
What Are Mortgage Points?
Mortgage points (aka discount points) are prepaid interest. You pay more upfront to get a lower interest rate on your mortgage.
The Basics:
- 1 point = 1% of your loan amount.
- Each point typically lowers your rate by 0.25%, though this varies.
- Example: On a $300,000 loan, 1 point costs $3,000 and could reduce your rate from 6.5% to 6.25%.
Should You Buy Points?
Ask yourself:
- How long will you stay in the home?
- Use the break-even formula: Upfront cost ÷ monthly savings = months to break even.
- Do you need the cash for other costs (repairs, furniture, moving)?
- Are you confident in your long-term plans?
- Buying points only makes sense if you’ll stay long enough to recoup the upfront cost.
PMI vs. Points: Side-by-Side
| Feature | PMI | Mortgage Points |
| Required? | Yes (if <20% down) | Optional |
| Purpose | Protect lender | Save borrower money over time |
| Cost | Ongoing monthly fee | One-time upfront cost |
| Benefit | Allows earlier purchase | Lowers interest rate |
Strategy Tips
- If you’re tight on upfront cash, PMI might be worth accepting temporarily.
- If you’re planning to stay in the home for 7+ years, points can save you more over time.
- Some lenders offer lender-paid PMI at a higher interest rate. It’s not free—just hidden in the rate.
Final Word
Understanding PMI and mortgage points helps you make better decisions about what kind of loan and payment structure is right for you. These tools aren’t good or bad—they’re just options. The key is using them in a way that aligns with your goals, budget, and timeline.
