What Is PMI?
Private Mortgage Insurance (PMI) is a type of insurance policy that protects your lender — not you — if you stop making mortgage payments and default on your loan. It is typically required on conventional loans when your down payment is less than 20% of the home's purchase price, meaning your loan-to-value ratio exceeds 80%.
Why Lenders Require PMI
When a borrower puts down less than 20%, the lender takes on more risk. If the borrower defaults and the home is foreclosed, the lender may not recover the full loan balance through the sale. PMI compensates the lender for that gap. From the borrower's perspective, PMI is an added cost that makes homeownership accessible with a smaller down payment — rather than waiting years to save a full 20%.
PMI is arranged by the lender and paid for by the borrower. The insurance company pays a claim to the lender if you default; you receive no direct benefit from the policy.
How Much Does PMI Cost?
PMI premiums typically range from 0.5% to 1.5% of the original loan amount per year, depending on your loan-to-value ratio, credit score, loan term, and insurer. The higher your LTV and the lower your credit score, the more expensive your PMI will be.
| LTV Range | Credit Score 760+ | Credit Score 700–759 | Credit Score 640–699 |
|---|---|---|---|
| 85.01% – 90% | ~0.30%/yr | ~0.55%/yr | ~0.85%/yr |
| 90.01% – 95% | ~0.52%/yr | ~0.80%/yr | ~1.10%/yr |
| 95.01% – 97% | ~0.78%/yr | ~1.05%/yr | ~1.35%/yr |
On a $300,000 loan at 0.75% annually, PMI adds roughly $187 per month to your payment. Use the PMI Calculator to estimate your specific cost.
How PMI Is Paid
There are three main ways PMI premiums can be structured:
- Monthly PMI: The most common arrangement. The annual premium is divided by 12 and added to your monthly mortgage payment. No large upfront cost, but you pay it each month until the policy is cancelled.
- Single-Premium PMI: You pay the full PMI cost upfront at closing, either in cash or rolled into the loan balance. This eliminates the monthly charge but increases your loan amount or closing costs. It may make sense if you plan to stay long-term.
- Lender-Paid PMI (LPMI): The lender pays the PMI premium in exchange for a slightly higher interest rate on your loan. There is no separate PMI line item, but your rate — and therefore your payment — is permanently higher. LPMI cannot be cancelled the way borrower-paid PMI can.
When Does PMI Cancel?
The Homeowners Protection Act of 1998 (HPA) established clear rules for PMI cancellation on conventional loans:
- Automatic cancellation at 78% LTV: Your lender must automatically cancel PMI once your loan balance reaches 78% of the original purchase price, based on your scheduled payment dates — even if your home has not appreciated.
- Request cancellation at 80% LTV: You can submit a written request to cancel PMI once your balance reaches 80% of the original value. The lender may require proof that the home has not declined in value and that you have a good payment history.
- Final termination at the midpoint: If PMI has not been cancelled by either method above, the lender must terminate it at the midpoint of your loan's amortization schedule (for example, year 15 on a 30-year loan).
Home appreciation does not automatically trigger PMI cancellation. However, if your home's value has increased significantly, you may be able to request cancellation based on a new appraisal once you have at least 20-25% equity, depending on lender guidelines.
PMI vs. FHA Mortgage Insurance Premium (MIP)
PMI and FHA MIP are both forms of mortgage insurance, but they work differently:
- PMI applies to conventional loans. It can be cancelled once you reach 20% equity. Cost depends heavily on credit score and LTV.
- FHA MIP applies to FHA loans. It includes an upfront premium (1.75% of the loan amount) plus an annual premium (0.55%–1.05%/yr). For most FHA borrowers who put down less than 10%, MIP lasts the life of the loan and cannot be cancelled without refinancing.
Because of this difference, a conventional loan with PMI can be less expensive over time than an FHA loan with lifetime MIP — especially for borrowers with good credit. See the FHA Loan Calculator to compare total costs side by side.
Strategies to Avoid or Minimize PMI
- Put 20% down: The straightforward path. Eliminates PMI entirely from the start.
- Piggyback loan (80-10-10): Take a first mortgage for 80%, a second mortgage (HELOC or home equity loan) for 10%, and put 10% down. The first mortgage avoids PMI because its LTV is 80%.
- Make extra principal payments: Accelerate the timeline to reach 80% LTV and request early cancellation.
- Choose LPMI: Trades a monthly PMI line item for a higher rate — useful if you expect to refinance or sell within a few years.
For a deeper look at elimination strategies, see our guide: How to Avoid PMI. For a full explanation of how PMI works, visit What Is PMI?
Source: CFPB — What is private mortgage insurance?
This definition is for informational purposes only and does not constitute financial advice.