For homebuyers unable to make a 20% down payment, Private Mortgage Insurance (PMI) often stands between renting indefinitely and achieving homeownership. However, understanding what PMI is, how it affects your monthly payments, and whether you can deduct it on your taxes requires careful consideration. This comprehensive guide explains PMI’s mechanics, weighs its advantages against drawbacks, and clarifies the significant tax changes taking effect in 2026.
Defining Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is a type of insurance that protects lenders when borrowers make down payments of less than 20% on conventional mortgage loans. According to Fannie Mae, PMI is calculated as a percentage of your mortgage loan amount—typically ranging from 0.58% to 1.86% annually—and rolled into your monthly mortgage payment (Fannie Mae, n.d.).
Importantly, PMI protects the lender, not the borrower. ProVisor emphasizes this crucial distinction: “PMI is in place to make sure the lender gets the money they are owed, should the buyer default on the loan and have to foreclose on the mortgage. You are making payments to protect the lender; you are not protecting yourself.”
Freddie Mac estimates that PMI typically costs between $30 and $70 per month for every $100,000 borrowed, though actual costs vary based on down payment amount, credit score, loan size, and loan type.
Pros and Cons of PMI in a Mortgage
Understanding PMI’s advantages and disadvantages helps homebuyers make informed decisions about down payment strategies.
Advantages of PMI
Earlier Homeownership: BankSouth Mortgage highlights that PMI allows buyers to purchase homes without waiting years to save a 20% down payment, enabling them to move into their dream home significantly earlier. This proves particularly valuable in appreciating markets where home values increase faster than savings accumulate.
Preservation of Savings: Fannie Mae notes that making a smaller down payment preserves liquidity for other financial priorities like emergency funds, home improvements, or investments (Fannie Mae, n.d.).
Earlier Equity Building: By purchasing sooner rather than continuing to rent while saving for 20% down, buyers begin building equity immediately. Solarity Credit Union points out that home values have historically increased 3.6% annually since 1991, meaning waiting to avoid PMI could cost more than PMI itself .
Temporary Nature: Unlike FHA mortgage insurance which often lasts for the loan’s life, Freedom Mortgage emphasizes that PMI is temporary—it ends once you reach 20% equity in your home (Freedom Mortgage, n.d.). Federal law requires automatic cancellation at 78% loan-to-value ratio, or borrowers can request removal at 80%.
Flexible Payment Options: The RefiGuide explains that borrowers can choose between monthly PMI, upfront PMI paid at closing, financed PMI, or combination arrangements depending on their financial situation.
Disadvantages of PMI
Increased Monthly Costs: PMI adds to monthly mortgage payments until reaching the 20% equity threshold. On a $300,000 loan with 5% down, PMI might add $150-$300 monthly depending on credit score and other factors.
No Borrower Protection: Unlike homeowners insurance or mortgage protection insurance, PMI provides no benefit to borrowers—only to lenders.
Higher Total Interest: Rocket Mortgage notes that for borrowers with lower credit scores making minimal down payments, PMI can be more expensive than FHA mortgage insurance premiums.
Cancellation Requires Action: ProVisor warns that even when reaching 80% loan-to-value, PMI doesn’t automatically disappear. Borrowers must submit written cancellation requests, and some lenders require new appraisals verifying sufficient equity.
Is PMI Tax Deductible in 2026?
The tax treatment of PMI underwent significant changes in 2025, creating important benefits for qualifying homeowners beginning in tax year 2026.
Current Status: PMI premiums were not tax-deductible for tax years 2022 through 2025. However, Bankrate reports that the One Big Beautiful Bill Act, signed into law in July 2025, reinstated and made permanent the PMI deduction beginning with tax year 2026.
How It Works: H&R Block explains that starting in 2026, PMI premiums will be treated as mortgage interest for tax purposes. If you itemize deductions, PMI counts toward the $750,000 mortgage interest deduction limit ($375,000 for married filing separately) (H&R Block, 2025).
Income Limitations: The deduction includes income-based phase-outs. Loan Pronto clarifies that homeowners with adjusted gross income (AGI) below $100,000 ($50,000 for married filing separately) can deduct the full PMI amount. The benefit phases out completely at $109,000 AGI for most taxpayers ($54,500 for married filing separately), with 10% reduction for each $1,000 over the threshold (Loan Pronto, 2025).
Historical Impact: According to U.S. Mortgage Insurers, when the deduction was previously available through 2021, four million homeowners claimed it annually with an average deduction of $1,454—or $2,346 in the final year of 2021.
Requirements: Rocket notes that the reinstated deduction will apply to both PMI on conventional loans and mortgage insurance premiums (MIP) on FHA, VA, and USDA loans when filed in April 2027 for tax year 2026.
Evaluating PMI for Your Situation
PMI enables millions of Americans to achieve homeownership years earlier than saving 20% down would allow, but comes with increased monthly costs and provides no direct borrower protection. The 2026 reinstatement of PMI tax deductibility sweetens the proposition for qualifying middle-income homeowners, potentially saving hundreds to over a thousand dollars annually depending on income and tax bracket.
Before deciding whether to accept PMI or delay homeownership while saving a larger down payment, calculate your break-even point, consider your local housing market’s appreciation rate, and evaluate whether the reinstated tax deduction applies to your situation.
References
Fannie Mae. (n.d.). What to know about private mortgage insurance.
RefiGuide. (2024, September 11). Is private mortgage insurance (PMI) tax-deductible?
H&R Block. (2025, November 10). One Big Beautiful Bill: SALT deduction and other changes for homeowners.
ProVisor. (n.d.). Pros & cons of private mortgage insurance.
