FHA Loan vs. Conventional Loan: Which One Is Right for You as a Minnesota Homebuyer?…
What Is PMI and How Do You Avoid It in Minnesota?
What Is PMI and How Do You Avoid It as a Minnesota Homebuyer?
You’re sitting at the closing table going over your loan estimate and someone mentions PMI.
You nod. You smile. And inside you’re thinking — what exactly is that again?
I hear this all the time. Here’s what you actually need to know before it shows up on your statement.
What Is PMI?
PMI stands for private mortgage insurance.
It gets added to your mortgage payment when you put less than 20% down on a conventional loan.
Here’s the deal: PMI does not protect you. It protects the lender. If you stop making payments, PMI covers the bank’s loss. Not yours.
So you are paying for something that benefits someone else.
That said, PMI is not the enemy. It is the reason you can buy a home with 3%, 5%, or 10% down without spending years saving more. It is a tool. And like any tool, it helps to understand it before you use it.
What Is PMI and How Do You Avoid It? Here Is the Short Answer.
PMI is private mortgage insurance required on conventional loans when you put less than 20% down. The cost is based on your credit score and your loan-to-value ratio combined, so every buyer’s PMI rate is different. You can avoid it by putting 20% down, using a single premium structure, or choosing a loan program that does not require it like a VA loan.
What Does PMI Actually Cost?
This is where a lot of buyers get surprised.
PMI is not a flat fee. The cost is calculated based on two things: your credit score and your loan-to-value ratio. The lower your score and the less you put down, the higher the PMI rate. The stronger your credit and the closer you are to 20% down, the lower it goes.
That is why it is worth running your actual numbers before assuming PMI will break your budget. For some buyers it is modest. For others it is a real factor in which loan makes more sense.
Credit Score Matters More Than Most Buyers Know
If your credit score is below 680, pay close attention here.
Conventional PMI is priced based on your credit score and loan-to-value. At lower scores with a small down payment, the PMI cost on a conventional loan can get expensive fast. In those cases it is worth comparing an FHA loan side by side. FHA has its own mortgage insurance, but for buyers under 680 the total monthly payment can sometimes come out lower with FHA than with conventional PMI.
This is not a rule. It is a comparison worth running.
I have had buyers come in convinced conventional was the move and walk out with an FHA loan that saved them $200 a month. The math matters more than the assumption.
The Three Types of Conventional PMI
Most people think PMI is just a monthly fee tacked onto their payment. It is not that simple.
There are three ways conventional PMI can be structured.
Monthly PMI The most common setup. You pay a monthly premium added to your mortgage payment. It is cancellable once you reach 80% loan-to-value, either through paying down the balance or through home appreciation confirmed by an appraisal.
Single Premium You pay the full PMI cost upfront as a lump sum at closing. No monthly MI added to your payment. This works well for buyers who have the cash and want a cleaner monthly number.
Split Premium Part of the PMI cost is paid upfront at closing and part is paid monthly. The upfront amount reduces the ongoing monthly cost. A good middle ground for buyers who want to lower their monthly payment without paying the full single premium out of pocket.
Each structure fits a different situation. The right one depends on your cash at closing, your monthly budget, and how long you plan to stay in the home. A good loan officer walks through all three before you decide. If yours isn’t doing that, ask.
What About Lender-Paid PMI?
You may hear this term and wonder where it fits.
Lender-paid PMI is not a separate category. It is the single premium structure paid through lender proceeds. The lender covers the upfront PMI cost and offsets it with a slightly higher interest rate on your loan. Your monthly payment has no separate MI line but you are paying for it through the rate.
But there’s a catch. Unlike monthly PMI, you cannot cancel it later. It is built into the rate for the life of the loan. That makes it worth comparing carefully against the other options, especially if you plan to build equity quickly or refinance within a few years.
When Does PMI Go Away?
On a conventional loan with monthly PMI you have two paths.
The first is automatic. When your loan balance drops to 78% of the original purchase price, your lender is required by law to cancel PMI as long as your payments are current.
The second is by request. Once you reach 80% loan-to-value, you can ask your lender to remove it. But there are specific requirements you need to meet first.
Here is what servicers typically look for:
→ You must have been in the home for at least 12 months → You must have a history of on-time payments → You will likely need to order an appraisal to confirm your current value
That last point matters in Minnesota where home values have climbed in many markets. If your home has appreciated, an appraisal could show you are already at or below 80% LTV even if your payments alone haven’t gotten you there yet.
Before you do anything else, call your loan servicer first. Every servicer has their own specific guidelines for PMI removal. Find out exactly what they need before you spend money on an appraisal.
FHA loans work differently. Mortgage insurance on an FHA loan does not cancel the same way as conventional PMI. You can read the full breakdown in the FHA loan vs conventional loan post here.
Real Ways to Avoid PMI
Put 20% down. No PMI required on conventional. But in the Twin Cities where median home prices are around $355,000, that means coming up with over $70,000 upfront. Not always realistic.
Use a single premium structure. Pay the MI cost once at closing and carry no monthly premium. Works well if you have the cash and want a cleaner payment.
Use a split premium. Pay part upfront to reduce the monthly cost. A solid middle ground for buyers with some cash to work with.
VA loan. If you or your spouse served, a VA loan has no monthly MI requirement. There is a one-time funding fee that can often be rolled into the loan. If you qualify, this is almost always the first place I start.
Piggyback loan (80/10/10). This structure uses an 80% first mortgage, a 10% second loan, and 10% down. It keeps the primary loan at exactly 80% to avoid PMI. It adds complexity but works well for the right buyer. Worth asking about if you are close to that 10% threshold.
One More Thing Worth Knowing About PMI in 2026
PMI used to be tax deductible. Then it went away for a few years.
Congress recently passed the One Big Beautiful Bill, which brings that deduction back and makes it permanent. It applies starting in the 2026 tax year, which means it shows up when you file your 2026 return in 2027.
Here is how it works. PMI gets treated similarly to mortgage interest. If you itemize your deductions, you may be able to deduct what you paid in mortgage insurance premiums. There are income limits and the deduction starts to phase out around $100,000 in adjusted gross income. It also covers FHA mortgage insurance, VA funding fees, and USDA guarantee fees.
I am not a CPA and this is not tax advice. Talk to a licensed tax preparer who knows your full situation before you count on any deduction. But this is worth knowing about, especially if you are buying now and wondering whether PMI will cost you as much as you think over time.
The Better Question to Ask
Most buyers ask how to avoid PMI.
Why does this matter? Because the better question is whether paying PMI gets you into a better financial position than waiting.
In many cases, buying now with PMI and building equity beats paying rent while you save for a perfect down payment. PMI is temporary. Rent is not.
But every situation is different. Your credit, your savings, your monthly budget, and your goals all matter.
You can check current mortgage rates here and run your numbers in the mortgage calculator to see what your payment looks like with and without PMI factored in.
Ready to Look at Your Options?
If you are trying to figure out whether PMI makes sense for your situation, or how to structure a loan that works around it, that is where this conversation starts.
No pressure. Just a clear look at what your options actually are.
Start your application here when you are ready. Or visit the Education Hub to keep learning first.
The right structure for your loan is out there. Let’s find it together.
Ken Graczak is a licensed mortgage broker with CFR Mortgage, serving buyers and homeowners across Minnesota, Wisconsin, and Florida. This post is for educational purposes only and does not constitute financial or tax advice.
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