Real Estate

Private Mortgage Insurance: What It Is, What It Costs, and When It Goes Away

Real Estate Editorial Team 7 min read · May 4, 2023
Private Mortgage Insurance: What It Is, What It Costs, and When It Goes Away

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In this article
  1. Why Lenders Require PMI
  2. How PMI Premiums Are Calculated
  3. When and How PMI Is Removed
  4. Strategies to Reach Cancellation Faster

Understand why lenders require PMI on certain loans, how premiums are calculated, and the conditions under which you can have it removed.

Key Takeaways

  • PMI protects the lender, not the buyer, in case of loan default.
  • Most conventional loans require PMI when the down payment is less than 20%.
  • PMI typically costs between 0.2% and 2% of the loan amount per year.
  • Federal law requires lenders to cancel PMI automatically once you reach 22% equity.
  • Borrowers can request PMI removal once they reach 20% equity based on the original home value.
  • Paying down principal faster or getting a new appraisal may help you cancel PMI sooner.

Why Lenders Require PMI

When a borrower makes a down payment below 20%, the lender is financing a larger share of the property's value. That elevated loan-to-value ratio (LTV) represents greater risk: if the borrower defaults early in the loan, the lender may not recover its full investment through a foreclosure sale. PMI transfers that risk to an insurance company.

Think of PMI as the price of entry for buyers who haven't yet accumulated a full 20% down payment. It allows lenders to extend conventional loans to a broader pool of borrowers while managing their exposure. For buyers, it means accessing homeownership sooner — though at an added monthly cost. This dynamic is part of how your total mortgage payment is constructed, alongside principal, interest, property taxes, and homeowners insurance.

PMI vs. MIP: Know the Difference

PMI applies to conventional loans and is governed by the Homeowners Protection Act. FHA loans instead charge a Mortgage Insurance Premium (MIP), which operates under separate federal rules. Unlike PMI, MIP on FHA loans originated after June 2013 with a down payment below 10% generally cannot be cancelled — it remains for the life of the loan. Buyers choosing between loan types should factor this distinction into their long-term cost projections.

How PMI Premiums Are Calculated

PMI isn't a flat fee — it's calculated as a percentage of your original loan amount and varies based on several factors:

  • Down payment size: The smaller your down payment, the higher your LTV, and generally the higher your PMI rate.
  • Credit score: Borrowers with stronger credit scores typically qualify for lower PMI rates.
  • Loan type and term: Fixed-rate loans usually carry lower PMI costs than adjustable-rate loans. For a comparison of loan structures, see fixed-rate vs. adjustable-rate mortgages.
  • Occupancy: Primary residences typically receive lower PMI rates than investment properties.

On a $350,000 loan with a PMI rate of 0.7%, you'd pay roughly $2,450 per year — about $204 per month added to your payment. Over several years before cancellation, that total adds up meaningfully, which is why understanding the removal rules matters.

0.2%–2%

Typical annual PMI rate range

According to the Urban Institute and industry mortgage data, most conventional loan PMI rates fall within this range of the original loan amount annually.

37%

First-time buyers putting less than 20% down

The National Association of Realtors has reported that a significant share of first-time buyers make smaller down payments, making PMI a common feature of their loans.

$100–$300

Estimated monthly PMI cost on a median-priced home

Based on industry estimates applying typical PMI rates to U.S. median home loan amounts; actual costs vary by lender, credit profile, and loan size.

When and How PMI Is Removed

The Homeowners Protection Act of 1998 established clear federal rules governing PMI cancellation on conventional loans:

  1. Borrower-requested cancellation: Once your loan balance reaches 80% of the home's original purchase price (or appraised value at closing, whichever was lower), you can submit a written request for cancellation — provided your payment history is in good standing.
  2. Automatic termination: When the balance reaches 78% of the original value through scheduled amortization, the lender must cancel PMI without requiring you to ask.
  3. Final termination: If PMI has not been cancelled through the above triggers, lenders must terminate it at the loan's midpoint — for example, at year 15 of a 30-year mortgage.

One important nuance: appreciation alone doesn't trigger automatic cancellation under the Act. If your home's market value has risen substantially, you may be able to request cancellation based on a current appraisal, but your lender sets its own policies — many require the loan to be at least 24 months old and may have seasoning requirements. Buyers navigating these cost decisions should also be aware of common financing assumptions that can cost thousands.

Strategies to Reach Cancellation Faster

If reducing the time you pay PMI is a priority, several approaches can help you build equity more quickly:

  • Make extra principal payments: Any additional payment applied directly to principal accelerates the point at which your balance crosses the 80% threshold.
  • Request a new appraisal: If your home has appreciated meaningfully and your lender permits appraisal-based cancellation, a current market value may show your LTV is already at or below 80%.
  • Refinance: If interest rates have moved favorably and your home has appreciated, refinancing into a new loan at a lower LTV could eliminate PMI — though refinancing carries its own closing costs worth weighing carefully. Some buyers evaluate whether paying mortgage points upfront to reduce their rate also affects their overall cost picture.

No strategy is universally right. The value of canceling PMI faster depends on your loan balance, the cost of any action taken, and how long you plan to stay in the home. Consulting with a licensed mortgage professional can help you model the specific numbers for your situation.

This article is for general informational purposes only and does not constitute financial, legal, or mortgage advice. Consult a licensed mortgage professional or financial adviser regarding your specific circumstances.

Frequently Asked Questions

No. PMI protects the lender, not you, in the event of default. It does not provide any payment relief or coverage for the borrower during financial hardship. Separate products like mortgage protection insurance exist for borrower-side coverage, though their terms vary widely.
Some borrowers use a piggyback loan — a second mortgage taken simultaneously to avoid PMI — but this typically results in a higher combined interest cost. Certain lenders also offer PMI-free loans at smaller down payments, often in exchange for a slightly higher interest rate. Each approach has trade-offs worth evaluating carefully.
PMI continues until your loan-to-value ratio (LTV) drops to 80% based on the original purchase price, at which point you can request cancellation. Lenders must automatically terminate PMI once LTV reaches 78% through scheduled payments.
Yes, in some cases. If your home has appreciated significantly, a new appraisal may show that your current LTV is already at or below 80% of the home's current value. Lenders have discretion over whether to accept a new appraisal for cancellation purposes, and many require the loan to be at least two years old.
PMI deductibility has changed repeatedly through congressional action and is not permanently established in the tax code. Consult a qualified tax professional to understand whether a deduction applies to your situation in the current tax year.
Real Estate Editorial Team

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Real Estate Editorial Team is the collective byline for our editorial team and contributor network. Articles published under this byline or an editorial pen name are researched, written, and reviewed according to our editorial standards for clarity, consistency, and independence before publication.

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