Private mortgage insurance (PMI) is a monthly fee that protects your lender — not you — if you stop making mortgage payments. It applies when you put down less than 20% on a conventional home loan. PMI adds $50 to $300 or more to your monthly mortgage payment depending on your loan size and credit score. The good news: it is not permanent. Once you build enough equity, you can remove it.
Why Lenders Require PMI
When you put down less than 20%, lenders consider the loan higher risk. If you default and the home sells for less than the outstanding loan balance, the lender takes a loss. PMI insures the lender against that loss. You pay the premiums, the lender receives the protection. It feels unfair — and it is — but it is the price of getting into a home with a smaller down payment.
How Much Does PMI Cost?
PMI typically costs 0.5% to 1.5% of your loan amount per year, divided into monthly payments. On a $300,000 loan, that is $1,500 to $4,500 per year — or $125 to $375 per month. Your rate depends on your down payment size, credit score, and loan term. The higher your credit score and the more you put down, the lower your PMI rate.
Types of PMI
- Monthly PMI (most common): Added to your mortgage payment each month. Cancellable once you hit 20% equity.
- Single-premium PMI: Paid upfront at closing. No monthly PMI cost, but the upfront amount is significant and typically non-refundable if you sell or refinance early.
- Lender-paid PMI: The lender pays the PMI in exchange for a higher interest rate. You cannot cancel it — to get rid of it, you must refinance.
- Split-premium PMI: Combination of an upfront payment and reduced monthly premiums.
When PMI Automatically Cancels
Federal law (the Homeowners Protection Act) requires automatic PMI cancellation on conventional loans:
- At 80% LTV: You can request cancellation when your loan balance drops to 80% of the original home value, provided you have a good payment history and the home has not declined in value.
- At 78% LTV: PMI must be automatically terminated when your loan balance reaches 78% of the original purchase price, even if you do not request it.
- At the midpoint: PMI must be cancelled at the halfway point of your loan term (year 15 on a 30-year mortgage) regardless of LTV.
Note: these rules apply to conventional loans only. FHA loans have different rules — see below.
How to Remove PMI Early
1. Pay Down the Principal Faster
Make extra payments toward your principal to reach 80% LTV sooner. Even an extra $100–$200 per month can shave years off your PMI timeline.
2. Request Cancellation Based on Appreciation
If your home has appreciated significantly, you may reach 80% LTV ahead of schedule even without extra payments. You typically need to have the home professionally appraised to demonstrate the new value. Lenders generally require at least two years of on-time payments before granting early cancellation based on appreciation.
3. Refinance
If your home has appreciated enough that your new loan would be at or below 80% LTV, refinancing eliminates PMI. Be sure the lower monthly cost justifies the closing costs of refinancing (typically 2–5% of the loan amount).
PMI on FHA Loans Is Different
FHA loans use mortgage insurance premiums (MIP) instead of PMI. FHA MIP includes an upfront premium (1.75% of the loan amount) plus an annual premium (0.55%–1.05%). For loans with less than 10% down, MIP lasts the entire life of the loan — it does not cancel at 80% LTV. Many FHA borrowers refinance into a conventional loan once they reach 20% equity to eliminate the ongoing MIP cost.
Is PMI Worth It?
PMI is the cost of buying a home sooner rather than waiting until you save 20%. In many markets, home appreciation over the time it would take to save that extra down payment exceeds the total PMI cost. Run the numbers for your situation — if buying now with PMI and removing it within 3–5 years results in more equity than waiting, the math often favors buying.
Bottom Line
PMI is temporary and manageable. Understand when it cancels automatically, monitor your loan-to-value ratio as you make payments, and request cancellation as soon as you hit 80% LTV. Do not wait for the automatic 78% threshold — proactive cancellation saves you months of premiums.