What Is PMI? How Private Mortgage Insurance Works

What Is Private Mortgage Insurance (PMI)?

Private mortgage insurance is a monthly charge that protects your lender — not you — if you stop making mortgage payments. It’s required on conventional loans when your down payment is less than 20% of the home’s purchase price. The insurance pays the lender a portion of the outstanding loan balance if you default and the home goes to foreclosure.

Here’s what trips up most buyers: PMI doesn’t protect you at all. It doesn’t cover your payments if you lose your job. It doesn’t reduce your mortgage balance. It doesn’t help you keep your home. It’s an extra cost you pay so the lender feels comfortable giving you a loan with less than 20% equity. From the lender’s perspective, borrowers with smaller down payments are statistically more likely to default, so PMI offsets that risk.

The good news? PMI is temporary. Unlike some other forms of mortgage insurance, PMI on conventional loans can be removed once you’ve built enough equity — usually when your loan-to-value (LTV) ratio drops to 80% or below. That equity threshold can be reached through regular payments, home value appreciation, or a combination of both.

How Much Does PMI Cost?

PMI typically costs 0.5-1.5% of your original loan amount per year, paid monthly. The exact rate depends on your credit score, loan-to-value ratio, and loan type.

Two patterns stand out: higher credit scores dramatically reduce PMI costs, and smaller down payments increase them. A buyer with a 760 credit score putting 10% down might pay $75/month, while a buyer with a 640 score putting 3% down could pay $450/month for the exact same loan amount. That’s a $375/month difference caused entirely by credit quality and equity position.

Use the calculate your mortgage payment to factor PMI into your total monthly payment when comparing loan scenarios.

How to Remove PMI

Automatic Termination at 78% LTV

Under the Homeowners Protection Act of 1998, your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price — assuming you’re current on payments. This happens through normal amortization (paying down the loan over time). No action required on your part.

On a $300,000 loan with a $350,000 purchase price, PMI automatically drops off when your balance reaches $273,000 ($350,000 x 0.78). With a 6.5% interest rate on a 30-year mortgage, that takes roughly 8-9 years of regular payments.

Borrower-Requested Removal at 80% LTV

You don’t have to wait for the automatic termination. Once your LTV reaches 80% based on the original purchase price, you can request PMI removal in writing. The lender must comply if you meet these conditions:

• Your loan balance is at or below 80% of the original purchase price
• You’re current on payments with a good payment history (no 30-day lates in the past 12 months, no 60-day lates in the past 24 months)
• No subordinate liens on the property (second mortgages, HELOCs)

The 80% threshold arrives about 1-2 years before the automatic 78% threshold. On the example above, you’d hit 80% LTV ($280,000 balance) roughly 7-8 years into the loan, saving 1-2 years of PMI payments — potentially $1,800-$5,400 in savings just by sending a letter.

Refinance to Remove PMI

If your home has appreciated enough to push your current LTV below 80%, you can refinance into a new loan without PMI. This is common in rapidly rising markets — you bought at $350,000, but the home is now worth $420,000. Your $280,000 loan balance represents 67% LTV on the new value, well below the 20% threshold. Check refinance closing costs to make sure the refi math works.

Request a Reappraisal

Some lenders will remove PMI based on a new appraisal showing increased home value, even without a full refinance. You’ll pay for the appraisal ($300-$600), but if the new value puts your LTV at or below 80%, the lender cancels PMI. This is cheaper than a full refinance and worth pursuing if your area has seen strong appreciation. Not all lenders offer this option — check your loan servicer’s policy.

PMI vs. MIP: Conventional vs. FHA Mortgage Insurance

This is one of the biggest differences between FHA and conventional loans. FHA’s mortgage insurance premium (MIP) sticks around for the entire loan term if you put less than 10% down. Even with 10%+ down, MIP lasts for 11 years rather than dropping off at 80% LTV like conventional PMI. The only way to eliminate FHA MIP before those thresholds is to refinance into a conventional loan once you have 20% equity.

For buyers with credit scores above 680, conventional PMI is usually cheaper than FHA MIP — especially factoring in the 1.75% upfront MIP that FHA charges at closing. Run both scenarios with your lender to see which costs less over your expected ownership period.

Types of PMI

Borrower-Paid Monthly PMI (Most Common)

You pay a monthly premium added to your mortgage payment. This is the default option and what most people think of when they hear “PMI.” The monthly amount is based on your credit score, LTV, and loan amount. It gets removed when you reach the equity threshold. Straightforward and predictable.

Single-Premium PMI (Upfront)

You pay the entire PMI cost as a lump sum at closing. On a $300,000 loan, this might be $3,000-$6,000 upfront instead of $150-$300/month. The advantage: no monthly PMI payment, which means a lower monthly mortgage. The disadvantage: it’s non-refundable. If you sell or refinance in 2-3 years, you’ve overpaid versus the monthly option. Single premium works best if you plan to stay in the home for 7+ years.

Lender-Paid PMI (LPMI)

The lender covers the PMI cost in exchange for a higher interest rate — typically 0.25-0.50% higher. You never see “PMI” on your monthly statement because it’s baked into the interest rate. The catch: since it’s built into your rate, you can’t remove it. The only way to eliminate LPMI is to refinance the entire loan. This option works if the higher rate still saves you money versus paying PMI monthly — usually when the rate premium is small and you plan to refinance within a few years. Compare rates on the rates page.

Split-Premium PMI

A hybrid approach: you pay part of the PMI upfront and part monthly. This reduces (but doesn’t eliminate) your monthly PMI payment while costing less upfront than full single premium. Some lenders offer this, but it’s the least common option. It works for buyers who want a lower monthly payment but don’t have enough cash for the full single premium.

Ways to Avoid PMI Entirely

Put 20% Down

The straightforward path. On a $350,000 home, that’s $70,000 — a big number, but it eliminates PMI from day one. For many buyers, reaching 20% takes years of saving, which is why the other options on this list exist. The first-time buyer guide covers saving strategies in detail.

Piggyback Loan (80-10-10)

Take a first mortgage for 80% of the home’s value, a second mortgage (HELOC or home equity loan) for 10%, and put 10% down. The first mortgage is at 80% LTV, so no PMI is required. You’re replacing the PMI cost with interest on the second mortgage, which may or may not be cheaper depending on current rates. The math works best when PMI rates are high (low credit score, low down payment) and second mortgage rates are reasonable.

VA Loan (No PMI for Veterans)

VA loans have zero down payment requirement and zero PMI. Instead, they charge a one-time funding fee (1.25-3.30% depending on down payment and service status) that can be rolled into the loan. For eligible veterans, active-duty members, and surviving spouses, this is the best deal in residential lending.

Physician and Professional Loans

Some lenders offer PMI-free loans to doctors, dentists, attorneys, and other high-income professionals. These loans typically allow 0-10% down without PMI, banking on the borrower’s future earnings to offset the risk. Higher interest rates apply, but eliminating PMI can make these worthwhile during the early career years. Read about various financing strategies when preparing your offer.

Is PMI Always a Bad Thing?

No. PMI gets a bad reputation, but it serves a real purpose: it lets you buy a home sooner with a smaller down payment. The question isn’t whether PMI is good or bad — it’s whether paying PMI to buy now costs less than waiting years to save 20%.

The Opportunity Cost of Waiting

Say you can buy today with 10% down ($35,000 on a $350,000 home) and pay $150/month in PMI, or wait 3 more years to save the full 20% ($70,000). During those 3 years:

• You’d pay $5,400 in PMI ($150 x 36 months)
• Home prices might increase 3-5% per year — a $350,000 home could cost $405,000 in 3 years
• You’d miss 3 years of building equity through payments and appreciation
• You’d pay 3 more years of rent, which builds zero equity

In many markets, the $5,400 in PMI is far cheaper than the $55,000 in home price appreciation you’d miss by waiting. PMI is the cost of getting into the market sooner, and in rising markets, it’s often the smarter financial move. Use the calculator at calculate your mortgage payment to model your specific scenario.

When PMI Really Hurts

PMI becomes expensive for borrowers with lower credit scores. If your score is 640 and you’re putting 3% down, your PMI rate could be 1.5-1.8% — that’s $375-$450/month on a $300,000 loan. At that level, it might make sense to spend 6-12 months improving your credit score before buying. A jump from 640 to 700 could cut your PMI cost in half. The buying with lower credit guide covers strategies for improving your position before you apply.

Frequently Asked Questions

Is PMI tax-deductible?

The mortgage insurance premium deduction has been available in some tax years but has required annual renewal by Congress. Check the current tax year’s rules, as this deduction has expired and been extended multiple times. When available, it allows borrowers earning under $100,000 to deduct PMI payments on Schedule A. Above $100,000, the deduction phases out. Consult a tax professional for your specific situation.

How long will I pay PMI?

On average, 5-8 years for borrowers who put 10% down on a 30-year conventional loan. If you put 5% down, expect 8-11 years. If you put 3% down, it could be 10-13 years. Home appreciation can speed this up — if your home value increases 20% in 4 years, you might hit 80% LTV through appreciation alone and request early removal.

Can I remove FHA mortgage insurance?

If your FHA loan originated after June 3, 2013, and you put less than 10% down, MIP stays for the life of the loan. The only way to remove it is to refinance into a conventional loan once you have 20% equity. If you put 10%+ down, FHA MIP drops off after 11 years. This permanent MIP is one of the main reasons buyers with 680+ credit scores should consider conventional over FHA.

Can my lender refuse to cancel PMI?

At the 78% automatic termination point, no — cancellation is required by federal law. At the 80% borrower-requested point, the lender can require proof that you meet the conditions (payment history, no subordinate liens, possibly a new appraisal at your expense). They can delay removal until conditions are met, but they can’t permanently refuse if you meet the criteria. If you believe your lender is improperly maintaining PMI, contact the Consumer Financial Protection Bureau (CFPB).

Is PMI included in my escrow payment?

Usually, yes. Most lenders collect PMI as part of your monthly escrow payment along with property taxes and homeowner’s insurance. Your total monthly payment includes principal, interest, taxes, insurance, and PMI — often abbreviated as PITMI. When PMI is removed, your monthly escrow payment decreases by the PMI amount, and your overall mortgage payment drops accordingly. Read about how escrow works for a full explanation.