PMI — private mortgage insurance — is a monthly premium that gets added to your mortgage payment when your down payment is less than 20% of the home's purchase price. It exists because lenders consider low-down-payment borrowers higher risk: if you default on the loan and the home sells for less than you owe, the lender takes a loss. PMI is insurance against that loss. The notable part: it protects the lender, not you. You pay for it; someone else benefits from it. That's not a scandal — it's just worth understanding clearly before you sign.
When PMI applies
On a conventional mortgage, PMI is typically required whenever your loan-to-value (LTV) ratio exceeds 80% — in other words, whenever you're borrowing more than 80% of the home's value. If you put 10% down, your LTV at closing is 90%, and PMI kicks in. If you put 20% down, LTV is 80% and PMI is not required.
LTV isn't just about your down payment. It can also come into play if you buy a home and it subsequently falls in value, pushing your effective LTV above 80% even if you made a reasonable down payment. In that scenario, you can't cancel PMI until the balance drops relative to the original purchase price — the home's current market value doesn't help you on the cancellation timeline (though a new appraisal can help in some circumstances; more on that below).
What PMI actually costs
PMI is priced as a percentage of your loan amount per year, then divided into monthly installments added to your mortgage payment. The exact rate depends on your loan size, credit score, down payment, and lender. As a general range: PMI commonly costs a fraction of a percent to a bit over one percent of the loan per year — your lender will give you the specific figure in your Loan Estimate. On a large loan, even a fraction of a percent adds up to a meaningful monthly line item, which is why so many buyers fixate on the 20% down threshold.
PMI is usually paid monthly as part of your escrow payment, but some lenders offer alternatives: a single upfront premium at closing, or a slightly higher interest rate in exchange for the lender covering the premium (lender-paid PMI — more on that below).
The Homeowners Protection Act (HPA) gives you two key rights on conventional loans. First, you can request cancellation in writing once your loan balance reaches 80% of the home's original purchase price — you must be current on payments and may need to show the home hasn't declined in value. Second, your lender is legally required to automatically terminate PMI when your balance drops to 78% of the original purchase price (based on the scheduled amortization), again assuming you're current. You don't have to do anything for the automatic cancellation — but requesting it at 80% can get you there a few months earlier.
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Conventional-loan rule of thumb under the Homeowners Protection Act. Cancellation is based on the original purchase price; a new appraisal may help if your home has gained value.
How to get rid of PMI
You have several routes to PMI removal, depending on your situation:
- Let the schedule do the work. As you make regular payments, your balance falls. When it hits 78% of the original purchase price on schedule, the lender must cancel PMI automatically under the HPA.
- Request cancellation at 80% LTV. Don't wait for 78%. Once you believe your balance is at or below 80% of the original value, write to your servicer and request cancellation. You may need to certify you have no junior liens and that the home's value hasn't dropped — check with your lender for their specific requirements.
- Make extra principal payments. Paying more than the minimum accelerates the paydown and gets you to 80% LTV faster.
- Refinance. If home values have risen and you now have more than 20% equity based on the current appraised value, refinancing into a new conventional loan may eliminate PMI. You'll need to weigh the closing costs and run the break-even math. (See our companion article on refinancing.)
- Request a new appraisal. Some lenders will consider a current appraisal rather than the original purchase price if your home has appreciated significantly. Policies vary — ask your servicer.
PMI vs FHA mortgage insurance: not the same thing
PMI is specific to conventional loans. If you take out an FHA loan (backed by the Federal Housing Administration), you'll pay a mortgage insurance premium (MIP) instead, which works differently in a few important ways.
FHA MIP includes an upfront premium paid at closing, plus ongoing monthly premiums. Critically, depending on your loan term and how much you put down, FHA MIP can last for the entire life of the loan rather than dropping off at 80% LTV. For many borrowers, this makes a conventional loan with PMI more attractive than an FHA loan once the credit profile allows it — because PMI has a clear exit, and FHA MIP often doesn't. If you started with an FHA loan, refinancing into a conventional loan once you have sufficient equity is a common strategy for getting out of mortgage insurance entirely.
Ways to avoid PMI in the first place
If you'd rather not deal with PMI at all, there are a few approaches:
- Put 20% down. The straightforward route. You start with 80% LTV and PMI never applies.
- Piggyback loans (80-10-10). Some buyers take a conventional first mortgage for 80% of the price, a second mortgage (home equity loan) for 10%, and put 10% down — keeping the first loan's LTV at 80% and avoiding PMI. The second loan typically carries a higher rate than the first, so compare the blended cost against what PMI would have been.
- Lender-paid PMI (LPMI). The lender covers the PMI premium in exchange for a slightly higher interest rate on your loan. You avoid the explicit monthly PMI line item, but you pay more in interest for the life of the loan — and you can't cancel it the way you can cancel borrower-paid PMI. This can make sense if you plan to sell or refinance relatively soon, but works against you over a long hold.
None of these are automatically better or worse. The right call depends on your down payment size, credit profile, how long you plan to keep the loan, and the specific numbers your lender quotes.
Sources & further reading
- Consumer Financial Protection Bureau — What is private mortgage insurance? (consumerfinance.gov)
- Homeowners Protection Act of 1998 (Public Law 105-216)
- Investopedia — Private Mortgage Insurance (PMI) (investopedia.com)
Related
- 📚 How mortgage refinancing works — one route to dropping PMI once you have enough equity.
- 📚 What is escrow? — how your PMI, taxes, and insurance get bundled into one monthly payment.
- 📚 Good debt vs bad debt — where a mortgage fits in the bigger picture of borrowing.
- 📚 More explainers in the Learn hub