What Is PMI and How Does It Affect My Texas Home Purchase?

If you are putting less than 20% down on a Texas home, your lender will likely require private mortgage insurance. It is not a penalty — it is insurance for the lender. But understanding what it costs and when it goes away can save you real money.

What Is PMI?

Private mortgage insurance (PMI) is a type of insurance that protects the mortgage lender — not the borrower — in the event the borrower defaults on the loan. Lenders typically require PMI on conventional loans when the buyer makes a down payment of less than 20%, because a lower down payment means the lender has less equity cushion if the property needs to be foreclosed and resold. PMI does not benefit the buyer directly; it is a cost the buyer pays to obtain financing with a lower down payment than the 20% threshold that lenders consider a lower-risk benchmark.

How Much Does PMI Cost in Texas?

PMI typically costs between 0.5% and 1.5% of the original loan amount per year, depending on the borrower's credit score, loan-to-value ratio, and the specific lender's pricing. On a $350,000 loan with a PMI rate of 0.85%, the annual cost is $2,975 — or approximately $248 per month added to the mortgage payment. Higher credit scores generally produce lower PMI rates; a borrower with a 760 score typically pays significantly less PMI than a borrower with a 640 score on the same loan amount.

Does PMI Apply to All Loan Types?

PMI applies specifically to conventional loans with less than 20% down. Government-backed loans have their own insurance equivalents: FHA loans require both an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount and an annual MIP of 0.55% to 1.05% depending on the loan term and loan-to-value ratio. VA loans — available to eligible veterans, active-duty military, and surviving spouses — require no PMI and no monthly mortgage insurance of any kind, which is one of the most significant financial advantages of VA financing. USDA loans require an upfront guarantee fee and an annual fee but no traditional PMI.

How Do You Get Rid of PMI?

For conventional loans, the Homeowners Protection Act requires lenders to automatically cancel PMI when the loan balance reaches 78% of the original purchase price, based on the original amortization schedule. Borrowers can also request cancellation when they believe the loan balance has reached 80% of the home's current market value — which may occur faster than the original schedule if the home has appreciated. To request early cancellation based on appreciation, most lenders require a formal appraisal at the borrower's expense. In Texas's Hill Country, where home values have appreciated significantly over the past decade, some homeowners have been able to eliminate PMI significantly ahead of schedule through this route.

PMI vs Larger Down Payment: The Math

Some buyers debate whether to put 20% down to avoid PMI versus putting 10% down and paying PMI while keeping more cash available. At a PMI rate of 0.85% on a $350,000 loan, the annual cost is approximately $2,975. The additional $35,000 in down payment needed to reach 20% on a $350,000 home — if invested instead at a conservative 5% annual return — would generate approximately $1,750 per year. In that scenario, the PMI cost exceeds the investment return, suggesting 20% down is financially advantageous. But this calculation is highly sensitive to current investment returns, the specific PMI rate, and how quickly the loan-to-value ratio improves. A trusted lender can run the specific numbers for your situation.

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