Private mortgage insurance (PMI) is a fee many homebuyers pay when they cannot put 20% down on a conventional mortgage. It protects the lender — not you — if you default on the loan. Most borrowers want to eliminate PMI as quickly as possible, and understanding how it works is the first step.
What Is PMI?
PMI is insurance required by most conventional mortgage lenders when a borrower’s down payment is less than 20% of the home’s purchase price. The premium is added to your monthly mortgage payment (or paid upfront, depending on the structure).
PMI exists because lenders consider low-down-payment borrowers higher risk. The insurance compensates the lender if you stop making payments and they have to foreclose.
How Much Does PMI Cost?
PMI typically costs 0.2% to 2% of your loan amount annually, depending on your credit score, loan-to-value ratio, and loan type. The premium is added to your monthly mortgage payment.
Example:
- Home price: $350,000
- Down payment: 10% ($35,000)
- Loan amount: $315,000
- PMI rate: 0.7% annually
- Annual PMI cost: $2,205
- Monthly PMI payment: ~$184
As a general estimate:
- Credit score above 760 + 10% down: approximately 0.20%–0.50% of loan value
- Credit score 700–759 + 5% down: approximately 0.50%–1.00%
- Credit score below 700 + 5% down: approximately 1.00%–2.00%
Types of PMI
Borrower-Paid PMI (BPMI)
The most common type. The monthly premium is added to your mortgage payment until you reach 20% equity. This is automatically cancelled when you reach 22% equity based on the original purchase price.
Single-Premium PMI (SPMI)
You pay the entire PMI premium upfront at closing. Monthly payments are lower, but you lose the upfront amount if you refinance or sell before building significant equity.
Lender-Paid PMI (LPMI)
The lender pays the PMI premium in exchange for a higher interest rate on your loan. There is no separate PMI line item, but you pay a higher rate for the life of the loan — even after you would have otherwise cancelled BPMI. This is often the more expensive option long-term.
Split-Premium PMI
A hybrid approach where you pay part upfront and part monthly. It reduces monthly costs without requiring the full upfront premium.
How Long Do You Pay PMI?
Under the Homeowners Protection Act (HPA), lenders must automatically cancel borrower-paid PMI when your loan balance reaches 78% of the original purchase price (i.e., 22% equity), based on your scheduled payment timeline.
You can also request cancellation when your loan balance reaches 80% of the original purchase price (20% equity). To do this, you must:
- Have a good payment history (no payments 30+ days late in the past year)
- Request cancellation in writing
- Confirm your property value has not declined (lender may require an appraisal)
How to Avoid PMI
Put 20% Down
The simplest solution: save a 20% down payment before buying. On a $350,000 home, that is $70,000. This eliminates PMI entirely and reduces your loan balance, which lowers your monthly payment.
Piggyback Loan (80/10/10)
Take out a primary mortgage for 80% of the purchase price, a second mortgage (home equity loan or HELOC) for 10%, and put 10% down yourself. The primary mortgage stays at 80% LTV, which avoids PMI. The second mortgage has a higher rate, but may cost less than PMI depending on the amounts and rates involved.
Lender-Paid PMI
As mentioned, the lender absorbs the PMI premium in exchange for a higher interest rate. This eliminates the monthly PMI line item but adds cost via a permanently higher rate. Run the math over your expected ownership period before choosing this option.
VA Loans (for Eligible Borrowers)
VA loans, available to veterans and active military, require no down payment and no PMI. The VA funding fee is a one-time charge that is often less than years of PMI payments.
USDA Loans
USDA loans (for eligible rural and suburban properties) have no PMI but do charge an annual guarantee fee (currently 0.35% of the outstanding balance), which is lower than conventional PMI in most cases.
How to Remove PMI Early
You do not have to wait for automatic cancellation. There are two ways to speed up the process:
Make Extra Principal Payments
Every extra dollar applied to your principal reduces your loan balance and gets you to 80% LTV faster. Even modest extra payments each month can shave months or years off your PMI timeline.
Get a New Appraisal
If your home has appreciated significantly since purchase, a new appraisal may show you have already reached 80% LTV based on current value (not original purchase price). Many lenders allow PMI cancellation based on appraised value if:
- You have owned the home for at least 2 years, OR
- You have owned it for at least 5 years and the value has increased enough to put you at 80% LTV
An appraisal costs $300–$600 but can save thousands in PMI if your home has appreciated.
PMI vs. MIP: What Is the Difference?
PMI is for conventional loans. FHA loans have their own version called Mortgage Insurance Premium (MIP). There are key differences:
- MIP includes both an upfront premium (1.75% of the loan amount) and an annual premium (0.55%–1.05%)
- For FHA loans with less than 10% down, MIP lasts the life of the loan — it cannot be cancelled the way PMI can
- For FHA loans with 10% or more down, MIP drops off after 11 years
This is a significant long-term cost of FHA loans. Borrowers who can qualify for a conventional loan and plan to stay in the home for many years are often better served by a conventional loan with PMI (which can be cancelled) than an FHA loan with permanent MIP.
Bottom Line
PMI adds real cost to your monthly mortgage payment, but it is not permanent. The fastest paths to eliminating it are reaching 20% equity through payments and appreciation, making extra principal payments, or getting a new appraisal after your home increases in value. If you are buying soon, run the numbers on whether a 20% down payment, a piggyback loan, or a VA/USDA loan eliminates PMI entirely from the start.