Private mortgage insurance — PMI — is a charge added to your monthly mortgage payment when you put down less than 20% on a conventional home purchase. It protects the lender if you default, not you. You pay for it, but it benefits the bank.
That said, PMI also makes homeownership accessible to buyers who haven’t accumulated a large down payment, which is why it exists and why understanding its costs and removal options matters.
When PMI Applies
PMI is required on conventional mortgages when your loan-to-value (LTV) ratio exceeds 80% — meaning you’re borrowing more than 80% of the home’s value. With a 10% down payment on a $400,000 home, you’d borrow $360,000 against a $400,000 value, resulting in a 90% LTV. PMI applies until LTV drops to 80% or below.
FHA loans have their own insurance — called MIP (mortgage insurance premium) — with different rules. USDA and VA loans have their own structures as well. PMI in the traditional sense applies to conventional loans only.
How Much PMI Costs
PMI typically costs between 0.5% and 1.5% of the loan amount annually, though the rate depends on:
- Your credit score (higher score = lower PMI rate)
- Your down payment percentage (closer to 20% = lower rate)
- The loan term
- The insurer your lender uses
On a $300,000 loan at a 1% PMI rate, you’d pay $3,000/year or $250/month in PMI. On a $500,000 loan at 0.7%, that’s $3,500/year or ~$292/month. PMI adds up to a meaningful amount over the years before you can remove it.
How PMI Is Paid
Most borrowers pay PMI monthly as part of their mortgage payment. Some lenders offer:
- Single-premium PMI: Paid upfront at closing, either in cash or rolled into the loan balance. Eliminates the monthly charge but increases what you owe.
- Lender-paid PMI (LPMI): The lender pays PMI upfront and charges you a slightly higher interest rate for the life of the loan. No separate PMI charge, but the higher rate sticks even after you’d otherwise reach 20% equity.
How to Remove PMI
Automatic cancellation
Under the Homeowners Protection Act, your lender is required to automatically cancel PMI when your loan balance reaches 78% of the home’s original purchase price — based on your scheduled payment timeline. This happens automatically; you don’t need to request it.
Requesting cancellation at 80% LTV
You can request PMI cancellation once your loan balance drops to 80% of the original purchase price (not current value). You must be current on your payments and have a good payment history. The lender may require a confirmation that the home’s value hasn’t declined, but they can’t charge you for a full appraisal for this purpose.
Refinancing
If your home has appreciated significantly, refinancing can eliminate PMI by establishing a new LTV below 80% based on the current appraised value. You’d need to pay closing costs and qualify for a new loan, so this makes sense only if the rate environment supports it or you’d otherwise benefit from refinancing.
Requesting reappraisal
If your home has increased in value, you can sometimes request that your lender order an appraisal and remove PMI if the new LTV is 80% or below. Policies vary by lender — some require a minimum of two years of payments before considering an appraisal request.
Strategies to Minimize PMI
- 80-10-10 piggyback loan: Take a first mortgage for 80% of the purchase price, a second mortgage (home equity loan or HELOC) for 10%, and put 10% down. No PMI on the first mortgage since LTV is 80%. The second mortgage carries higher interest but may cost less than PMI depending on the rates and loan size.
- Make extra principal payments: Accelerate the timeline to reach 20% equity faster and request early PMI removal
- Choose lender-paid PMI carefully: Run the numbers on whether the higher rate over the full loan term is better or worse than monthly PMI that eventually disappears
FHA Loan MIP Comparison
For comparison: FHA loans require a mortgage insurance premium for the life of the loan if you put down less than 10%. If you put down 10% or more, MIP cancels after 11 years. There’s also an upfront MIP of 1.75% charged at closing.
This makes conventional loans with PMI often preferable to FHA loans once you have decent credit — PMI can be cancelled, MIP on most FHA loans cannot. Borrowers with lower credit scores may still get better overall terms with FHA.
PMI is a cost of entry for many homebuyers, not a permanent condition. Knowing exactly when and how to remove it is worth building into your homeownership plan from the start.
