PMI (Private Mortgage Insurance) Explained: Cost, Rules, and How to Avoid It

What Is PMI and Why Is It Required?

Private mortgage insurance (PMI) is insurance that protects your lender — not you — if you default on your mortgage. Lenders require it when your down payment is less than 20% on a conventional loan because a smaller down payment means higher risk to the lender. If you stop making payments, PMI covers the lender's loss.

From your perspective, PMI is purely a cost of entry into homeownership with less than 20% down. It provides you no direct protection. However, it does enable you to buy a home sooner than if you had to wait until you saved a full 20% down payment, which in expensive markets could take a decade.

PMI is required on conventional loans only. FHA loans have their own mortgage insurance (MIP), which works differently and is covered in a separate guide. VA loans and USDA loans do not require mortgage insurance at all.

How Much Does PMI Cost?

PMI typically costs 0.5–1.5% of your original loan amount per year, paid as part of your monthly mortgage payment. The exact rate depends on your loan-to-value ratio, credit score, and insurer.

Here is how PMI costs break down on a $300,000 loan:

Borrowers with higher credit scores pay lower PMI rates. A buyer with a 760 credit score might pay 0.5%, while a buyer with a 640 score on the same loan might pay 1.2%. Your down payment percentage also matters — 15% down typically means lower PMI than 5% down.

Types of PMI: Borrower-Paid vs Lender-Paid

There are actually several ways PMI can be structured:

• Borrower-paid PMI (BPMI): The most common type. Added to your monthly mortgage payment and cancels once you reach 20% equity.
• Lender-paid PMI (LPMI): The lender pays the PMI premium upfront but charges you a higher interest rate for the life of the loan. Cannot be canceled by reaching 20% equity because it is baked into the rate. Only worthwhile if you plan to sell or refinance soon.
• Single-premium PMI: You pay the entire PMI cost upfront at closing (typically 1–2% of the loan amount) in exchange for no monthly PMI charge. Risky if you sell before recouping the upfront cost.
• Split-premium PMI: A hybrid where you pay a partial premium upfront and a reduced monthly amount.

When Does PMI Go Away?

The Homeowners Protection Act (HPA) of 1998 gives you clear rights regarding PMI cancellation:

• Automatic cancellation: Your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price, based on your scheduled amortization — even if your home's value hasn't changed.
• Requested cancellation at 80%: You can request PMI cancellation in writing once your loan-to-value ratio reaches 80% of the original purchase price. You must have a good payment history and, in some cases, confirm the home's value hasn't declined.
• Cancellation based on current value: If your home has appreciated significantly, you may be able to cancel PMI sooner by requesting a new appraisal. Lenders typically require the loan to be at or below 80% of the current appraised value, and many require 2 years of ownership before considering appreciation.

Keep these dates in mind: automatic PMI cancellation at 78% LTV on a $300,000 loan with 5% down ($285,000 loan) will happen around year 11 on a standard 30-year amortization schedule. Accelerating paydown or a home value increase can dramatically shorten that timeline.