PMI is Good for the Bank, Bad for You

Private Mortgage Insurance (PMI) is one of the biggest scams in the mortgage industry. The bank forces you to buy insurance that protects them, not you. You pay the premiums, but if you default, the insurance company pays the bank. You get nothing. It's a protection racket disguised as a "requirement." The bank wins. The insurance company wins. You lose. Every single month. Here's the truth about PMI and how to avoid this expensive trap.

1. What is PMI?

PMI stands for Private Mortgage Insurance. It's insurance that protects the bank if you default on your mortgage. If you put down less than 20% on a conventional loan, the bank requires you to buy PMI. They'll tell you it's "for your protection" or "standard practice." That's a lie. It's for their protection. If you default and the bank forecloses, the PMI company pays the bank the difference between what you owe and what the house is worth. You don't get a penny. You've been paying premiums for months or years, and when the bank needs protection, the insurance company pays them. You're paying for the bank's insurance policy. It's like paying for your neighbor's car insurance. It makes no sense, but the bank requires it, so you have to do it. Or do you?

2. Why PMI Exists (The Bank's Protection Racket)

PMI exists because banks want to make loans to people who can't afford a 20% down payment, but they don't want to take the risk. So they force you to buy insurance that protects them. It's a brilliant scam. The bank gets to make more loans (more profit from interest), but they don't take the risk. You take the risk, and you pay for the insurance that protects the bank. The insurance company makes money from premiums. The bank makes money from interest and gets protection. You pay for everything and get nothing. It's a three-way win for everyone except you. The bank will tell you that PMI is "necessary" because you're a "higher risk" borrower. But if you're such a high risk, why is the bank lending to you? Because they're not taking the risk. You are. And you're paying for their insurance.

3. The Real Cost of PMI

PMI typically costs 0.5% to 1.5% of your loan amount per year. On a $400,000 mortgage with 10% down, you're borrowing $360,000. PMI at 1% costs $3,600 per year, or $300 per month. That's $300 every month that goes straight to an insurance company to protect the bank. You get nothing. Over 5 years (the typical time it takes to reach 20% equity), you'll pay $18,000 in PMI premiums. That's $18,000 you'll never see again. That's $18,000 that could have gone to your down payment, your principal, or your savings. Instead, it goes to protect the bank. The bank loves this because they get to make the loan (more interest) without taking the risk. You hate it because you're paying $300 a month for nothing. The math is simple. The choice is yours.

4. Why Banks Love PMI

Banks absolutely love PMI. Here's why: They get to make loans to people who can't afford a 20% down payment. More loans mean more interest. More interest means more profit. But they don't take the risk because PMI protects them. It's the perfect setup. They make money from interest, and if you default, the insurance company pays them. They win either way. The bank will tell you that PMI is "required" and "protects you too." That's a lie. PMI doesn't protect you. It protects the bank. If you default, the insurance company pays the bank, not you. You lose your house, your credit, and all the PMI premiums you've paid. The bank gets paid. The insurance company gets your premiums. You get nothing. The bank loves PMI because it lets them make riskier loans without taking risk. You hate it because you pay for their protection.

5. How to Get Rid of PMI

The good news is that PMI doesn't last forever. Once you reach 20% equity in your home, you can request that PMI be removed. The bad news is that the bank won't automatically remove it. You have to ask. And they'll make it difficult. They'll require an appraisal (which you pay for, usually $400-$600). They'll check your payment history. They'll look for any reason to keep charging you. The bank doesn't want to lose that $300 a month. They'll drag their feet. They'll "lose" your request. They'll make you jump through hoops. But you can get rid of it. Once you hit 20% equity, send a written request to your mortgage servicer. Include proof of your equity (an appraisal or a broker's price opinion). Be persistent. The bank is required to remove PMI once you reach 22% equity based on the original purchase price, but you can request it at 20%. Don't wait. Request it immediately. Every month you wait is $300 down the drain.

6. How to Avoid PMI Altogether

The best way to avoid PMI is to put down 20%. I know, I know. "But I can't afford 20% down!" Here's the thing: If you can't afford 20% down, you probably can't afford the house. The bank will tell you that you "qualify" for a $500,000 house with 5% down. But that doesn't mean you can afford it. It means the bank can make money from you. Save the 20%. It's hard. It takes time. But it's worth it. A $400,000 house requires $80,000 down. That's a lot of money. But if you save $1,000 a month, it takes 6.7 years. If you save $2,000 a month, it takes 3.3 years. If you can't save $1,000-$2,000 a month, you can't afford the house. The bank wants you to think you can afford it with 5% down. You can't. You're just paying more in interest and PMI. Save the 20%. Avoid PMI. Save money. The bank hates this advice because it means fewer loans and less profit. But you'll love it because it means less debt and no PMI.

7. The PMI Cancellation Scam

Even when you reach 20% equity, the bank will try to keep charging you PMI. They'll tell you that you need an appraisal (which you pay for). They'll tell you that your equity calculation is wrong. They'll tell you that you need to wait until you reach 22% equity automatically. They'll make it as difficult as possible. The bank doesn't want to lose that $300 a month. They'll delay. They'll obfuscate. They'll hope you give up. Don't. Be persistent. Send written requests. Follow up. Document everything. The bank is required by law to remove PMI at certain thresholds, but they'll try to keep it as long as possible. They're counting on you being lazy or uninformed. Don't be. Fight for your money. That $300 a month is yours. Don't let the bank keep it.

8. The Bottom Line

PMI is a scam. You pay for insurance that protects the bank, not you. It costs hundreds of dollars per month and provides zero benefit to you. The bank loves it because they get to make riskier loans without taking risk. The insurance company loves it because they collect premiums. You lose because you pay for protection you don't get. The solution is simple: Save 20% for a down payment and avoid PMI altogether. If you already have PMI, pay down your mortgage aggressively to reach 20% equity, then request cancellation immediately. Don't let the bank keep charging you for their protection. PMI is a tax on people who can't afford a 20% down payment. Don't pay it. Save the money. Put down 20%. Avoid the scam. The bank will survive. You'll save thousands of dollars. That's the goal.