You found a lower interest rate. Your current mortgage feels like a relic from a different era—or maybe just from eighteen months ago when rates were higher. The math looks obvious: refinance, save money, move on with your life. But then you check your equity position and realize you’re sitting at 15%, maybe 18%. Not quite at the magic 20% threshold. And suddenly that simple refinance decision becomes a trap door into private mortgage insurance territory.
The decision to refinance with less than 20% equity isn’t really about whether PMI is good or bad. It’s about whether the total cost equation—lower rate minus PMI payments minus closing costs—actually leaves you ahead. And for many homeowners, the answer is more complicated than the refinance calculator suggests.
The Real Cost of PMI on a Refinance
Private mortgage insurance typically runs between 0.5% and 1.5% of your loan amount annually, according to the Consumer Financial Protection Bureau. On a $400,000 mortgage, that’s $2,000 to $6,000 per year, or roughly $167 to $500 per month. The exact rate depends on your credit score, loan-to-value ratio, and the type of PMI your lender requires.
Here’s what makes this particularly frustrating for refinancers: you might be escaping a higher interest rate only to add a new monthly expense that partially—or completely—erases your savings.
Consider this scenario. You’re refinancing from a 7.5% rate to a 6.5% rate on a $350,000 balance. That 1% reduction saves you roughly $292 per month in interest. But with 15% equity, your PMI might cost $175 to $290 monthly. Suddenly your $292 savings becomes $2 to $117 in actual monthly benefit. Factor in $8,000 in closing costs, and your break-even point stretches from 27 months to somewhere between 68 months and never.
The PMI trap isn’t that PMI exists. It’s that PMI transforms a clearly beneficial refinance into a marginal decision that requires you to stay in your home longer than you might want to.
When Refinancing Below 20% Equity Actually Makes Sense
Despite the PMI problem, there are legitimate scenarios where refinancing with less than 20% equity is the right call.
You’re dropping PMI anyway. If your current loan already has PMI and your new loan will too, you’re not adding a new cost—you’re just continuing an existing one. In this case, focus purely on whether the rate reduction justifies the closing costs. Many FHA-to-conventional refinances fall into this category, where you might actually reduce your PMI cost while also lowering your rate.
The rate differential is massive. A 2% or larger rate drop can overwhelm PMI costs entirely. If you locked in at 8% and can refinance to 5.75%, even adding $200/month in PMI might leave you $400/month ahead. These situations are less common but do occur after periods of rate volatility.
You’ll hit 20% equity soon. PMI on conventional loans must be canceled once you reach 22% equity automatically, or upon request at 20%, as required by the Homeowners Protection Act. If you’re at 18% equity and home values in your area are rising steadily, you might only pay PMI for 12-18 months. Run the numbers on total PMI paid versus total interest saved over that period. Often, the interest savings dominate.
You need the payment reduction for cash flow reasons. Sometimes the decision isn’t purely mathematical. If a lower payment—even one partially offset by PMI—keeps you from financial stress or allows you to avoid tapping retirement accounts, the PMI cost might be worth paying. Financial stability has value that doesn’t show up on a spreadsheet.
The Scenarios Where You Should Wait
Not every refinance opportunity is worth taking. Here’s when patience serves you better.
You’re at 16-19% equity and the rate drop is modest. If you’re within striking distance of 20% and the rate improvement is 0.75% or less, waiting often makes more sense. Continue making payments, let appreciation work in your favor, and refinance in 6-12 months without the PMI burden. The modest rate savings you’d capture now rarely compensate for months of PMI payments.
Your home value is uncertain. Refinancing requires a new appraisal. If your neighborhood has seen mixed results or your home has deferred maintenance, you might come in lower than expected. That 17% equity you calculated could become 14% equity, making the PMI situation worse. If you’re uncertain about your appraisal outcome, consider paying for an independent appraisal before committing to the refinance process.
You’re planning to move within 3-4 years. Closing costs on a refinance typically run 2-4% of the loan amount, according to Freddie Mac estimates. Add PMI to the equation, and your break-even timeline extends significantly. If there’s a reasonable chance you’ll sell before reaching that break-even point, you’re paying to refinance a house you won’t own long enough to benefit from.
Lender-paid PMI isn’t available at a reasonable cost. Some lenders offer to pay your PMI in exchange for a slightly higher interest rate. This can make sense when the rate increase is small (0.125-0.25%) because you avoid the monthly PMI payment and the hassle of cancellation. But if the only LPMI option adds 0.5% or more to your rate, you’re often better off with borrower-paid PMI that you can eventually cancel.
The Math Framework: Running Your Own Numbers
Before deciding, you need to calculate your specific situation. Here’s the framework:
Step 1: Calculate your true monthly savings. Take your current principal and interest payment and subtract your new principal and interest payment. This is your gross monthly savings from the rate reduction.
Step 2: Subtract the PMI cost. Get an actual PMI quote from your lender, not an estimate. The difference between your gross savings and your PMI cost is your net monthly savings.
Step 3: Calculate your break-even timeline. Divide your total closing costs by your net monthly savings. This tells you how many months until you’ve recovered your refinance costs.
Step 4: Estimate when PMI will end. Based on your payment schedule and reasonable appreciation assumptions (2-3% annually is conservative), calculate when you’ll hit 20% equity. Once PMI ends, recalculate your break-even including the period of reduced savings.
Step 5: Compare to your housing timeline. How long do you realistically expect to stay in this home? If your break-even is 36 months and you’re planning to move in 4 years, you only capture 12 months of benefit. Is that worth the hassle and risk?
For most homeowners considering a refinance with less than 20% equity, the honest answer falls somewhere in the middle: it’s not obviously good, it’s not obviously bad, and the right choice depends heavily on factors you can’t perfectly predict—future rates, home values, and how long you’ll actually stay.
What the PMI Decision Reveals About Your Bigger Picture
The PMI question often surfaces a deeper issue: why don’t you have 20% equity in the first place?
If you bought recently with less than 20% down, that’s simply where you are. PMI is a normal part of your path to full equity, and refinancing decisions should be made with that context. You’re not behind—you’re just earlier in the homeownership journey than someone who bought the same house ten years ago.
But if you’ve been in the home for years and equity hasn’t built, the refinance decision might be masking a bigger question about whether this home still makes financial sense. Have values in your area stagnated? Did you take cash out previously? Is the home requiring expensive maintenance that cuts into your ability to build equity through extra payments?
These aren’t reasons to avoid refinancing. But they’re worth examining before committing to a new 30-year loan on a property that hasn’t rewarded your ownership so far.
The Decision Framework
Here’s how to think through this decision:
Refinance now if: Your rate drop exceeds 1.5%, you’ll hit 20% equity within 18 months, you’re already paying PMI, or you need the payment reduction for legitimate cash flow reasons.
Wait if: You’re within 2-3 percentage points of 20% equity, the rate drop is under 1%, you might move within 4 years, or you’re uncertain about your home’s appraised value.
Get more information if: You haven’t gotten an actual PMI quote, you don’t know your current home value, or you haven’t calculated your true break-even timeline including the PMI period.
The PMI trap is real, but it’s not universal. Some homeowners will save thousands by refinancing despite the PMI cost. Others will waste thousands by rushing into a refinance that looks good on the surface but erodes once you add the insurance premium.
The difference between those outcomes isn’t luck. It’s whether you ran the numbers honestly, including the costs that lenders don’t emphasize, and whether you made the decision based on your actual timeline rather than some theoretical homeowner who stays forever.
Your next decision might be whether paying off your mortgage early makes sense given your current rate, or whether a HELOC offers better flexibility than a cash-out refinance for your goals.