What Is PMI (Private Mortgage Insurance)? How to Avoid It in 2026

Private mortgage insurance, or PMI, is a type of insurance that protects your lender — not you — if you stop making mortgage payments. Lenders require PMI when you put down less than 20% on a conventional home loan. It adds to your monthly housing cost without building equity. The good news: PMI is not permanent. Understanding how it works and when it goes away can save you thousands of dollars over the life of your loan.

Why Lenders Require PMI

When a borrower makes a small down payment, the lender takes on more risk. If the borrower defaults and the home loses value, the lender may not recover the full loan balance through foreclosure. PMI compensates the lender for that increased risk. It is required on conventional loans when the loan-to-value ratio (LTV) exceeds 80% — meaning the borrower owns less than 20% equity.

PMI protects only the lender. If you default, the insurer pays the lender’s loss, but you are still responsible for the debt and any deficiency.

How Much Does PMI Cost?

PMI typically costs between 0.5% and 1.5% of the original loan amount per year, depending on:

Your credit score (higher score = lower PMI rate)
Your down payment amount (larger down payment = lower LTV = lower PMI rate)
The loan term and type
The PMI provider chosen by your lender

On a $350,000 home with 5% down ($17,500), the loan balance is $332,500. At a 1% annual PMI rate, you pay $3,325 per year — or about $277 per month — on top of your principal, interest, taxes, and homeowner’s insurance. Over five years, that is $16,625 in PMI premiums before it cancels.

How PMI Is Paid

PMI is typically added to your monthly mortgage payment. Some loan structures offer alternatives:

Monthly PMI: Most common. Added to your monthly payment; cancels automatically when you reach 20% equity.
Single-premium PMI: A lump-sum PMI payment at closing, either paid out of pocket or rolled into the loan. Eliminates monthly PMI but costs more upfront and is non-refundable if you sell or refinance early.
Lender-paid PMI (LPMI): The lender pays PMI upfront in exchange for a slightly higher interest rate for the life of the loan. LPMI cannot be cancelled the way monthly PMI can — you are locked into the higher rate unless you refinance.

When Does PMI Cancel?

The Homeowners Protection Act of 1998 (HPA) gives you the right to cancel PMI once you have 20% equity in your home based on the original purchase price and original amortization schedule. Two cancellation paths exist:

Automatic cancellation: Your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price — assuming you are current on payments. This happens on the scheduled date in your amortization table, not when your home appreciates.
Requested cancellation: When your loan balance reaches 80% of the original purchase price, you can request PMI cancellation in writing. Your lender may require a good payment history, evidence that your property value has not declined, and no secondary liens on the property.

Canceling PMI Early with Home Appreciation

If your home has appreciated significantly, you may be able to cancel PMI before reaching the 80% mark based on original value. To do this:

Contact your lender and ask about their PMI cancellation policy based on current market value.
Order a lender-approved appraisal (you pay for it — typically $300–$600).
If the new appraisal shows you have at least 20–25% equity (lenders often require 25% for appreciation-based cancellation), submit a formal cancellation request.

Not all lenders allow this for the first two years of the loan. Check your loan agreement and ask your servicer directly.

How to Avoid PMI Entirely

Put 20% down: The simplest solution. A larger down payment eliminates PMI from day one.
Piggyback loan (80-10-10): Take a first mortgage for 80% of the home price, a second mortgage (home equity loan) for 10%, and put 10% down. Because the first loan is at 80% LTV, no PMI is required. The second loan carries a higher interest rate — compare total costs carefully.
VA loans: Veterans and eligible military members can use VA loans with 0% down and no PMI — one of the most valuable homebuyer benefits available.
USDA loans: Available for rural and suburban properties. No down payment required; instead of PMI, a lower guarantee fee applies.
FHA loans: FHA loans require mortgage insurance premium (MIP), not PMI — but MIP behaves differently. If you put less than 10% down on an FHA loan, MIP lasts the life of the loan regardless of equity. Putting 10% or more down reduces MIP to 11 years.

PMI vs. MIP: What Is the Difference?

PMI applies to conventional loans (not government-backed). MIP applies to FHA loans. The key differences:

PMI can be cancelled once you reach 20% equity. MIP with under 10% down cannot be cancelled — you must refinance out of the FHA loan to eliminate it.
PMI rates vary by lender and credit score. MIP rates are set by the FHA and are the same for all borrowers.
In some cases, a conventional loan with PMI is cheaper than an FHA loan with MIP — especially if your credit score is 680 or higher.

Bottom Line

PMI is an unavoidable cost when you put less than 20% down on a conventional loan, but it is not permanent. Track your equity, request cancellation as soon as you are eligible, and consider a 20% down payment or a VA/USDA loan if you qualify. The sooner you eliminate PMI, the more of each mortgage payment goes toward building real equity.