Mortgage insurance is what a small down payment costs. On a rental it appears the moment you put down less than 20%, it is charged beside the mortgage rather than inside it, and the protection it buys belongs to the lender.
Do you pay PMI on an investment property?
On a conventional loan, yes. The CFPB describes private mortgage insurance as cover “you might be required to buy” when your down payment is less than 20 percent of the purchase price, and it is blunt about who benefits: PMI “protects the lender, not you, if you stop making payments on your loan” (CFPB, What is private mortgage insurance?). You pay the premium and the lender holds the policy.
The same page lists three ways it gets charged: a monthly premium added to your mortgage payment, a one-time premium paid at closing, or a combination of both. The monthly version is the one most investors meet, and the one the calculator models.
Don’t confuse it with the policy on the building. Mortgage insurance pays your lender if you default; the landlord policy pays you if the house burns down. They sit on separate lines of the same deal.
How little can you put down on a rental?
Less than many investors expect, but not much. Freddie Mac caps a purchase on a one-unit investment property at 85% of the price, which puts the floor at 15% down. Two to four units stop at 75%, so a duplex or a fourplex needs 25% down and never carries mortgage insurance at all (Freddie Mac, maximum LTV requirements).
That leaves one narrow band on a single-family rental where mortgage insurance applies: 15% down up to 20%. The 3% and 5% down payments in the advertisements are for a house you live in: Freddie Mac allows 95% there, and that loan carries an occupancy promise.
What does 15% down cost each month?
Here is the calculator’s example house: $250,000, renting for $2,750 a month, with $3,000 a year of property taxes and a $1,400 policy. It holds back 5% of the rent for empty months, 5% for repairs, 5% for the big replacements like a roof, and 8% for a manager. The loan is a 30-year mortgage at 7%.
At 15% down the loan is $212,500 and the page estimates the premium at 0.84% of the loan a year, which is $1,785, or $149 a month. At 20% down the loan is $200,000 and the line disappears.
| 15% down | 20% down | |
|---|---|---|
| Rent | $2,750 | $2,750 |
| Empty months (5%) | −$138 | −$138 |
| Mortgage | −$1,414 | −$1,331 |
| Mortgage insurance | −$149 | – |
| Property taxes | −$250 | −$250 |
| Insurance | −$117 | −$117 |
| Repairs (5%) | −$137 | −$137 |
| Big repairs (5%) | −$137 | −$137 |
| Management (8%) | −$220 | −$220 |
| Cash flow each month | +$188 | +$420 |
These are example figures, not a forecast for any market.
The $12,500 you keep at closing costs $232 a month. Only $83 of that is the bigger mortgage. The other $149 is the premium, and it buys you nothing you can use.
Which down payment gives the best return?
Cash-on-cash return is the yearly cash flow divided by the cash you put in, so a smaller down payment usually flatters it. Here it does the opposite.
- 15% down: $45,000 in, $188 a month, 5.0% on your cash.
- 20% down: $57,500 in, $420 a month, 8.8%.
- 25% down: $70,000 in, $503 a month, 8.6%.
The return peaks at 20% down, because that is where the premium stops. Going from 15% to 20% adds $12,500 of cash and $232 of monthly return, a trade worth 22% a year on the extra money. Going from 20% to 25% adds $12,500 for $83 a month, which is 8% a year. The first step up is the one that pays.
Debt coverage moves the same way. The calculator weighs income after running costs against the mortgage payment, and notes that most lenders want 1.25 or better. This house reads 1.32 at 20% down and 1.12 at 15%, because the premium counts against the payment. A lender holding that floor would not write the 15% loan here. The DSCR loan requirements post shows what a shortfall does to the loan size.
When does mortgage insurance end on a rental?
This is where a rental parts company with a home.
On a loan for a house you live in, the Homeowners Protection Act gives you dates. The CFPB sets out all three: you can ask in writing for PMI to be cancelled when the balance is scheduled to fall to 80 percent of the original value, your servicer must end it automatically when the balance is scheduled to reach 78 percent, and it must end the month after the halfway point of the loan’s schedule even if the balance is still above that (CFPB, removing PMI). That page says those are the legal requirements “that apply to mortgages for single-family principal residences that closed on or after July 29, 1999.”
A rental is not a principal residence. The Act defines a residential mortgage as one created against a single-family dwelling “that is the principal residence of the mortgagor” (12 U.S.C. 4901(14)). So on a rental, the day the premium stops is whatever your note and your servicer say it is, not a right you can point to in the statute.
The calculator still has to pick a date, so its projection uses the 78% line and never runs past the loan’s midpoint. On this example that lands in year 7, and the ledger line reads “Mortgage insurance · ends in year 7”. Read it as an estimate. Over those 80 months the premiums come to $11,900, which is almost exactly the $12,500 the smaller down payment saved at closing.
Is 15% down worth it?
It comes down to what the $12,500 does somewhere else. If it is the difference between buying this year and waiting two more, the comparison is a $188 house now against a $420 house later. If it is sitting idle, the extra down payment returns 22% a year on this deal.
How long you hold tips it either way. The premium runs about seven years here and never shrinks as the balance falls, so a five-year hold pays most of it and sells before the relief arrives.
What to ask your lender
- The premium on your credit profile. The 0.84% the page uses is a placeholder. Real quotes move with your score and the loan size, so type the lender’s figure into the mortgage insurance box and read the cash flow again.
- Their cancellation rule in writing. Ask at what balance, and after how many payments, they drop it on a non-owner-occupied loan, and ask whether a new appraisal counts.
- The rate difference. Some lenders price a 15% down investment loan higher as well. Compare whole quotes, not premiums.
- Their debt coverage floor. If the rent has to cover the payment by 1.25 and the premium pushes you under it, the loan shrinks and the cash you bring goes back up. For the whole cash picture, the cash a rental purchase needs walks through every line.
Then run your own price, rent and premium through the rental calculator at both down payments and see which side of $12,500 your deal sits on.