Private mortgage insurance (PMI) is insurance that protects the lender, not you, if you stop paying a conventional mortgage. Lenders commonly require it when the down payment is under 20%, meaning the loan-to-value is above 80%. You pay the premium, usually as part of the monthly payment. Government-backed loans have their own mortgage insurance with different rules.
Monthly PMI = loan amount × annual PMI rate ÷ 12
You buy a $300,000 house to live in and rent out the spare rooms, a form of house hacking, with 10% down. The loan is $270,000. At an assumed annual PMI rate of 0.6%, the premium is $270,000 × 0.6% = $1,620 a year, or $135 a month. The rate varies by lender, credit score and down payment.
PMI is not permanent. On many conventional loans for a single-family home you live in, you can ask to drop it once the balance falls to 80% of the home’s original value ($240,000 here), and it commonly ends automatically when the balance is scheduled to reach 78% ($234,000) if payments are current. Servicers often add conditions, and thresholds are often stricter for two-to-four unit and investment properties, so ask your servicer. The common mistake is leaving PMI out of the analysis: $135 a month is $1,620 a year of pre-tax cash flow you never see.