What Is PMI? Private Mortgage Insurance Explained

If you are putting less than 20% down on a home, you will almost certainly encounter PMI — Private Mortgage Insurance. It is one of the most misunderstood costs in the homebuying process, and it adds hundreds of dollars to your monthly payment. Here is what you need to know.

What PMI Is

Private Mortgage Insurance is an insurance policy that protects the lender, not you. If you stop making mortgage payments and the lender has to foreclose, PMI reimburses the lender for a portion of their losses.

This is a critical distinction that many first-time buyers miss: you are paying for insurance that protects someone else. The lender requires it because a smaller down payment means they are taking on more risk. PMI reduces that risk for the lender, which is why they are willing to let you borrow with less than 20% down.

How Much PMI Costs

PMI typically costs between 0.5% and 1.5% of the original loan amount per year. The exact rate depends on your credit score, down payment percentage, loan amount, and the insurer.

Here is what that looks like in dollar terms:

On a $350,000 home with 5% down, you could be paying $139 to $416 per month in PMI alone. Over the years it takes to reach 20% equity, that adds up to thousands of dollars. This is why understanding PMI removal is so important.

When PMI Is Required

PMI is required on conventional loans whenever your down payment is less than 20% of the purchase price. In technical terms, it is required when your loan-to-value (LTV) ratio is greater than 80%.

Here is how the LTV calculation works:

• You buy a $300,000 home with 10% down ($30,000)
• Your loan amount is $270,000
• Your LTV is $270,000 / $300,000 = 90%
• Since 90% is above 80%, PMI is required

Note that FHA loans have their own version of mortgage insurance (called MIP) with different rules. More on that below.

FHA MIP vs. Conventional PMI

FHA loans and conventional loans both require mortgage insurance for low down payments, but the rules are very different. This is one of the most important comparisons for first-time buyers to understand.

The biggest difference is removability. With a conventional loan, PMI goes away once you hit 20% equity. With an FHA loan, if you put down less than 10%, the mortgage insurance premium stays for the entire life of the loan. The only way to remove FHA MIP is to refinance into a conventional loan once you have enough equity.

How to Remove PMI

On a conventional loan, you have two paths to removing PMI:

Automatic Cancellation at 78% LTV

By federal law (the Homeowners Protection Act of 1998), your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price. This happens through normal principal payments on your amortization schedule. You do not need to do anything — the lender is legally required to remove it.

Request Cancellation at 80% LTV

You can request PMI cancellation once your loan balance hits 80% of the original purchase price. This happens earlier than the automatic 78% threshold, so requesting saves you a few months of payments. To request:

1. Contact your loan servicer in writing
2. You must be current on your payments with a good payment history
3. You may need to pay for a new appraisal to confirm the home has not lost value
4. There can be no subordinate liens (such as a home equity loan) on the property

Accelerate PMI Removal

You can reach 20% equity faster in a few ways:

• Make extra principal payments — Even an extra $100 per month toward principal can shave years off your PMI timeline.
• Home value appreciation — If your home's value has increased significantly, you may reach 80% LTV sooner than expected. You will typically need a new appraisal to prove this.
• Home improvements — Renovations that increase your home's appraised value can push you past the 20% equity threshold, though the increase must be verified by an appraisal.

Strategies to Avoid PMI Entirely

If you want to avoid PMI altogether, here are your options:

• Save 20% for a down payment — The most straightforward approach. On a $300,000 home, that is $60,000. It takes longer to save, but you avoid years of PMI payments and start with significant equity.
• Piggyback loan (80/10/10) — Take out a primary mortgage for 80% of the home's value, a second mortgage (home equity loan or HELOC) for 10%, and put down 10% cash. Since the first mortgage is at 80% LTV, no PMI is required. However, the second mortgage typically has a higher interest rate.
• VA loan — If you are an eligible veteran or active-duty military member, VA loans require no down payment and no PMI. There is a one-time VA funding fee, but it is typically much less expensive than years of PMI.
• Lender-paid PMI (LPMI) — Some lenders offer to pay your PMI in exchange for a higher interest rate. This can make sense if you plan to sell or refinance within a few years, but it is more expensive over the long term because you cannot remove LPMI — it is baked into your interest rate.
• USDA loan — For eligible properties in rural areas, USDA loans offer zero down payment and no traditional PMI, though they do have a guarantee fee that functions similarly.

Related Tools

Run the numbers on PMI and down payment scenarios with these calculators: