If you are putting less than 20% down on a home, your lender will almost certainly require private mortgage insurance. PMI is one of the least understood costs in homebuying — buyers often see it on their loan estimate and wonder why they have to pay insurance for their lender’s benefit. Here is what PMI actually is, how much it costs, and how to get rid of it.
What Is PMI?
Private mortgage insurance is a policy that protects your lender — not you — if you stop making mortgage payments and the lender has to foreclose. When you put less than 20% down, lenders consider the loan higher risk. PMI transfers some of that risk to an insurance company, which is why lenders require it.
If you default and the home sells at a loss in foreclosure, your PMI policy pays the lender for the shortfall. As a borrower, you receive no direct benefit from PMI — you simply pay for it until you build enough equity to cancel it.
When Is PMI Required?
PMI applies to conventional loans when your down payment is less than 20% of the purchase price (or when your loan-to-value ratio exceeds 80%). It is not required for:
- FHA loans — these use a different type of mortgage insurance called MIP (Mortgage Insurance Premium), which is structured differently
- VA loans — no mortgage insurance of any kind
- USDA loans — no PMI, but they charge a guarantee fee instead
- Conventional loans with 20% or more down
How Much Does PMI Cost?
PMI typically costs 0.5% to 1.5% of your loan amount per year, depending on your credit score, loan-to-value ratio, loan term, and the specific insurer. On a $300,000 loan at 0.8% annually, PMI costs $2,400 per year, or $200 per month.
Factors that push PMI costs higher:
- Lower credit score (below 680)
- Higher loan-to-value ratio (closer to 97% LTV vs 85% LTV)
- Adjustable-rate mortgage
- Longer loan term
Your Loan Estimate (the standardized disclosure you receive after applying) will list the monthly PMI amount. Compare this across lenders — PMI rates can differ between insurers, and lenders use different insurers.
Types of PMI
Borrower-Paid Monthly PMI (BPMI)
The most common structure. You pay PMI as a monthly line item added to your mortgage payment. It cancels once you hit 20% equity (based on the original purchase price) and automatically terminates at 22% equity. This is the default option on most conventional loans.
Borrower-Paid Single-Premium PMI
You pay the full PMI cost upfront at closing as a lump sum instead of monthly. Can make sense if you have the cash and plan to stay in the home for a long time, but you forfeit the upfront premium if you refinance or sell early.
Lender-Paid PMI (LPMI)
The lender pays the PMI premium and charges you a slightly higher interest rate in exchange. Your monthly payment may be lower with LPMI, but you cannot cancel it — the higher rate is permanent for the life of that loan. To get rid of LPMI, you would need to refinance.
Split-Premium PMI
A hybrid: part of the premium is paid upfront at closing, part is paid monthly. Lowers the ongoing monthly cost versus BPMI but requires upfront cash.
How to Cancel PMI
Automatic Cancellation
Under the Homeowners Protection Act, lenders must automatically cancel borrower-paid PMI once your loan balance reaches 78% of the original purchase price, based on the scheduled amortization. You do not need to request this — it happens automatically, assuming you are current on payments.
Requesting Cancellation at 80% LTV
You have the right to request PMI cancellation when your loan balance reaches 80% of the original purchase price — earlier than the automatic 78% threshold. You must:
- Submit a written request to your loan servicer
- Have a good payment history (no 30-day late payments in the past year, no 60-day late payments in the past two years)
- Provide evidence that the property value has not declined (lenders may require an appraisal at your expense)
Home Value Appreciation
If your home has appreciated significantly, your current LTV may be below 80% even though you have not paid down that much principal. In this case you can request an appraisal (typically $400 to $600) and ask for PMI cancellation based on the new, higher value. Lenders have discretion here — this is not an automatic right under the Homeowners Protection Act, but many lenders will cancel PMI based on current value once you have had the loan for at least two years (some require five years).
Refinancing
If your home has appreciated and you refinance into a new conventional loan with 20% or more equity based on the current appraised value, the new loan will not have PMI. Whether refinancing makes sense depends on the rate difference and your break-even timeline on closing costs.
PMI vs MIP: The FHA Difference
FHA loans use Mortgage Insurance Premium (MIP) rather than PMI, and the rules are less favorable:
- Upfront MIP: 1.75% of the loan amount, paid at closing or rolled into the loan
- Annual MIP: 0.55% to 1.05% per year, paid monthly
- Cancellation: For FHA loans originated after June 2013 with less than 10% down, MIP lasts for the life of the loan — it cannot be canceled. With 10% or more down, MIP cancels after 11 years.
This is one reason that once FHA borrowers build 20% equity, many refinance into a conventional loan to eliminate the ongoing MIP cost.
Is PMI Worth Paying?
Whether paying PMI makes sense depends on your local rental market, how quickly home values are appreciating, and your opportunity cost for the down payment funds.
In many markets, paying PMI to buy sooner rather than saving for two to four more years to reach 20% down makes financial sense — especially if home prices are rising faster than you can save. The cost of waiting (higher purchase price, rising rates) can exceed years of PMI payments.
Do the math for your specific situation rather than treating PMI as automatically bad. For some buyers it is a reasonable cost of entry; for others, it is a strong signal to save more before buying.
Bottom Line
PMI is a cost of buying with less than 20% down — it protects your lender, not you, and you should plan to eliminate it as soon as you can. The fastest paths to cancellation are making extra principal payments to accelerate your equity buildup, or waiting for appreciation to push your LTV below 80% and then requesting a new appraisal. Once you hit 80% equity, do not wait for automatic cancellation at 78% — request it proactively and save months of premiums.