PMI Explained
Private mortgage insurance (PMI) is a fee that protects the lender — not you — if you stop paying and the home sells for less than the loan balance. Lenders require it on conventional mortgages whenever your down payment is under 20% of the purchase price, because a smaller down payment means a thinner cushion between the loan and the home’s value.
It is one of the most disliked lines on a mortgage statement, because it buys you nothing directly. But refusing to pay it can cost more than paying it. Here is how it works, how to get rid of it, and how to think about the trade-off.
What it costs
PMI typically runs 0.3% to 1.5% of the loan amount per year, billed monthly and added to your mortgage payment. Where you land in that range depends mostly on two things:
- Loan-to-value ratio (LTV). A 3% down payment (97% LTV) carries a much higher PMI rate than a 15% down payment (85% LTV).
- Credit score. A 760+ score might pay 0.3–0.5%; a 640 score on the same loan could pay 1.2% or more.
| Loan amount | PMI rate | Monthly PMI | Annual PMI |
|---|---|---|---|
| $250,000 | 0.4% | ~$83 | ~$1,000 |
| $320,000 | 0.5% | ~$133 | ~$1,600 |
| $400,000 | 0.8% | ~$267 | ~$3,200 |
| $400,000 | 1.2% | ~$400 | ~$4,800 |
That is money buying you no equity and no coverage for yourself. On the $320,000 example, $133 a month is about $1,600 a year, or nearly $8,000 over five years if it takes that long to reach 20% equity.
Mortgage insurance is not the same on every loan type
| Loan | Mortgage insurance | Can it be cancelled? |
|---|---|---|
| Conventional, <20% down | PMI, monthly (sometimes single upfront premium) | Yes — at 78–80% LTV (see below) |
| FHA, <10% down | MIP: upfront 1.75% + annual ~0.55% | No — lasts the life of the loan; you must refinance out |
| FHA, ≥10% down | Same MIP | Drops after 11 years |
| VA (eligible veterans) | None — one-time funding fee instead | n/a |
| USDA (rural) | Upfront + annual guarantee fee | Lasts the life of the loan |
This table is the reason a conventional loan with PMI often beats an FHA loan for a borrower with decent credit: the PMI goes away, the FHA MIP does not.
How PMI goes away (conventional)
Three separate paths, and the default one is slower than the one you can trigger yourself.
- Automatic termination. Under the federal Homeowners Protection Act, the servicer must drop PMI when your loan balance is scheduled to reach 78% of the original purchase price, provided you are current. This date is set at closing from the amortization schedule and ignores whether the home has gone up in value.
- Borrower request at 80%. You can ask for cancellation once the balance reaches 80% of the original value — months to a couple of years earlier than the automatic date. Extra principal payments move this date closer.
- New appraisal for appreciation. If your home has risen in value, many lenders let you cancel based on a current appraisal showing 20%+ equity (sometimes 25% if you have owned it under five years), even though the original-value schedule says you are not there. You pay for the appraisal (~$400–600), which is usually well worth it in a rising market.
How to actually request cancellation
- Check your numbers. Divide your current principal balance by the lesser of the original purchase price and original appraised value. Once that is at or below 80%, you can request.
- Confirm you qualify. You generally need a clean 12-month payment history, no 30-day-late payments in the past 24 months, and no second lien (a HELOC can block it).
- Send a written request to your servicer. Ask specifically for PMI cancellation under the Homeowners Protection Act. Keep a copy.
- If you are relying on appreciation, ask the servicer for its broker-price-opinion or appraisal process and who orders it. Do not pay for an appraisal until you know the servicer will accept it.
- Follow up in writing if you do not get a decision within 30 days.
- Verify the next statement shows the PMI line gone and your escrow adjusted.
Extra principal to reach 80% faster is one of the highest-return prepayments you can make, because you are buying back a fee, not just future interest.
LPMI: a worked comparison
Lender-paid PMI removes the PMI line by baking the cost into a higher rate — commonly about +0.25%. On a $320,000 loan:
| Monthly PMI (0.5%) | LPMI (+0.25% rate) | |
|---|---|---|
| Extra cost per month | ~$133, until 80% LTV | ~$47 for the entire loan |
| Cancellable? | Yes | No |
If you expect to reach 80% LTV and cancel within ~3 years, monthly PMI is cheaper overall. If you will keep this loan and rate for 10+ years without refinancing, LPMI can win. Because most people refinance or move within a decade, monthly PMI is the safer default.
Ways to avoid PMI
- Put 20% down — the clean option, if it does not drain your emergency fund.
- Piggyback loan (80/10/10) — first mortgage 80%, a second loan 10%, 10% cash. No PMI, but the second loan has its own (often variable) rate.
- VA loan — no mortgage insurance at all for eligible borrowers.
When paying PMI is the right call
Waiting until you have a full 20% has costs of its own: rent paid meanwhile (which builds no equity), a moving-target price if the market rises, and rates that can move against you. If buying now with 5–10% down lets you stop renting and lock a price, and you expect to cancel PMI within 3–4 years through payments plus appreciation, the total PMI can easily be less than another few years of renting. Model both paths with the mortgage calculator, which adds estimated PMI while your LTV is above 80%, and check the rent side with the rent vs buy calculator.
The bottom line
PMI is the price of a small down payment on a conventional loan — roughly $30–70 per month per $100,000 borrowed, until your LTV hits 80%. It is cancellable, unlike FHA MIP. Shorten the window with extra principal and a written request at 80%, use an appraisal if your home has appreciated, and skip it entirely with 20% down or a VA loan. Whether to pay it comes down to one comparison: the PMI you expect to pay versus the cost of renting while you save.