What is PMI? Private Mortgage Insurance Explained

What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is insurance that protects your mortgage lender if you stop making payments. It's required on conventional loans when your down payment is less than 20% of the home's value.

PMI doesn't protect you as the borrower—it protects the lender's investment. This allows lenders to offer loans to buyers who can't afford a large down payment.

Think of it as the price of a smaller down payment. A lender holding 95% of a home's value has very little to lose if the borrower walks away, so it prices that risk either into an insurance premium or into a higher rate. PMI is the itemized version: it shows up as its own line on your payment, which means you can see exactly what it costs and exactly when it ends. It also means the coverage is replaceable — you can drop it, refinance it, or structure your loan to avoid it entirely.

PMI is one of several mortgage insurance products. If your loan is FHA, VA, or USDA insured, different rules and different names apply, and the rest of this page breaks those out. For the broader context on how the loan itself works, start with our what is a mortgage primer.

When is PMI Required?

PMI is typically required when:

• Your down payment is less than 20%
• You have a conventional loan (not FHA, VA, or USDA)
• Your loan-to-value ratio (LTV) exceeds 80%

Government loans like FHA have their own insurance requirements (MIP), which work differently.

The trigger is always the same number: loan amount ÷ value. Put $40,000 down on a $400,000 home and you borrow $360,000, so your starting loan-to-value is 90% — mortgage insurance applies. Put down $80,000 and you borrow $320,000, exactly 80% — no PMI. Lenders round hard at that line: 80.01% gets you the premium, 80.00% does not.

Three situations pull PMI onto your payment:

• Purchase with less than 20% down. The most common route. A 5% down payment starts you at 95% LTV and a 10% down payment at 90% LTV; both require PMI, and the higher starting LTV means a higher premium.
• A cash-out refinance above 80% LTV. Pulling equity out pushes your balance past the threshold, and PMI returns even if you were previously free of it.
• A loan you already have, if you refinance. A new conventional loan at 90% LTV comes with a new PMI policy priced at that day's rate card.

VA loans never carry PMI, USDA carries an annual guarantee fee that behaves like monthly insurance, and FHA carries mortgage insurance for the life of the loan in many cases — see the government section below.

The threshold is also your exit ramp: once the loan reaches 80% by request or 78% by the automatic schedule, the requirement ends. Our down payment calculator shows the exact LTV each down payment produces before you commit.

How Much Does PMI Cost?

PMI costs vary based on your credit score, loan type, and down payment. Typical costs include:

• Monthly PMI: 0.5% to 1% of your loan amount annually
• On a $300,000 loan: $125 to $250 per month

Borrowers with lower credit scores or smaller down payments typically pay higher PMI rates.

Those two bullets are the rule of thumb: strong credit plus more equity can price below 0.5%, and a thin file at 95% LTV can price above 1%. Actual pricing is set by an insurer's rate card with four inputs: your credit score, your starting loan-to-value ratio, the loan term and type (30-year fixed prices differently from a 15-year or an ARM), and occupancy (a primary residence costs less to insure than a second home). The premium is quoted as an annual percentage of your original loan amount and locked at closing. Here is a representative rate card.

The math behind the last column is simple: $350,000 × 0.45% = $1,575 a year ÷ 12 = $131.25 a month. Read the table in two directions. Down the first column, the same loan and the same down payment cost a 740 borrower $88 and a 640 borrower $306 — a $218 monthly spread, $2,616 a year, roughly $15,700 over six years of coverage. Across the row, the 700-759 borrower who comes in at 90% LTV instead of 95% pays $93 instead of $131, saving $38 a month for the same credit score.

Two details matter for planning. First, because the premium is calculated from your original loan amount, the dollar figure stays flat until coverage ends — it does not shrink as your balance falls, though the share of your home's value it represents does drop. Second, PMI is not a fee you keep for the life of the loan: it is priced at a threshold and it stops at a threshold. Enter your own credit band, loan amount, and down payment in the PMI calculator to get a premium estimate and a cancellation month.

Monthly PMI, upfront MIP, and lender-paid PMI

Mortgage insurance shows up in three different payment structures. They are not interchangeable, and the cheapest option on the loan estimate is not always the cheapest over time.

The lender-paid column deserves a second look because it is often presented as "no PMI." On a $360,000 loan, borrower-paid at 6.5% plus a 0.45% premium is $2,275 + $135 = $2,410 a month; lender-paid at 7.125% is $2,425. Roughly even — but the borrower-paid version ends at payment 95 when the balance reaches 80% of the original value, dropping to $2,275, while the higher rate never ends. For a borrower in the 660-699 tier, where monthly PMI runs $210, lender-paid saves about $60 a month at the start and then costs $150 more a month once borrower-paid coverage would have ended. The saving accumulates for about 95 months, the penalty takes about 38 months to reverse it, and the crossover lands near year 11. Lender-paid PMI wins only if you sell or refinance inside that window — and a refinance carries its own closing costs.

One structural warning: an FHA upfront MIP is financed, so you pay interest on it for the entire term. Roll the $6,125 into a $350,000 loan at 6.5% and the balance starts at $356,125, raising the payment from $2,212 to $2,251 — you are borrowing the insurance, then paying 30 years of interest on it.

FHA, VA, and USDA: the alternatives to PMI

If PMI is the conventional-loan product, these are the government-program equivalents. Each replaces PMI with something structurally different.

• FHA mortgage insurance premium (MIP). Charged as 1.75% upfront plus an annual premium of roughly 0.45% to 0.55% depending on term and starting LTV. On a $350,000 loan the annual portion is about $160 a month. The removal rules are the reason to care: put down 10% or more and the annual premium ends after 11 years; put down less than 10% — the 3.5% FHA minimum — and MIP stays for the life of the loan unless you refinance. Model both sides on the FHA loan calculator.
• VA loans. No monthly mortgage insurance at all. Instead, a one-time funding fee of roughly 1.25% to 3.3% of the loan (depending on down payment and whether it is a first or subsequent use) is charged at closing, financed if you prefer, and waived entirely for veterans with a qualifying service-connected disability. See the VA loan calculator for the fee schedule effect on your payment.
• USDA loans. A 1% upfront guarantee fee financed into the loan, plus an annual fee near 0.35% collected monthly for the life of the loan. On a $250,000 loan that annual portion is about $73 a month — cheaper than most FHA setups, but it never drops off. Check the numbers on the USDA loan calculator.

Compare total cost, not just the insurance line. FHA with 3.5% down is the easiest to qualify for and the most expensive to keep; VA is the cheapest for those who qualify; conventional with PMI is the only structure where the insurance is guaranteed to end on a schedule.

How to Remove PMI

Once you build enough equity, you can remove PMI:

• Automatic Removal: At 78% LTV, lenders must automatically remove PMI
• Request Removal: At 80% LTV, you can request removal
• Refinance: A new loan may eliminate PMI if you have enough equity

Contact your lender to request a PMI removal once you reach 80% equity.

The federal Homeowners Protection Act governs those two thresholds on conventional loans, and they use two different yardsticks. That difference is where borrowers get confused.

The automatic test uses your original value. Your servicer must cancel PMI on the next payment date after your scheduled balance reaches 78% of what the home was worth at purchase — not what it is worth now, and not what an appraisal says. On a $350,000 home bought with 5% down, your loan starts at $332,500. Seventy-eight percent of $350,000 is $273,000, and at 6.5% over 30 years your balance does not reach that number until payment 135 — about 11 years and 3 months in. Extra principal does not move this date, because the calculation follows the original amortization schedule.

The request test uses today's value. You can ask your servicer to cancel once your balance is at or below 80% of the current value, which means appreciation counts. Take the same $332,500 balance: if the home is now worth $420,000, that is 79.2% LTV, and you qualify today. Send a written request. The servicer can order a verification of value at your expense — typically several hundred dollars — and must respond within about 30 days. On this loan the PMI is $125 a month, so a $600 appraisal pays for itself in under five months.

The other route works on payment alone: to reach 80% of the original $350,000 value you would need the balance at $280,000, which is $52,500 of principal reduction. That is where accelerated payments change the arithmetic — every dollar you add shortens the wait on both tests. Our extra payment calculator shows how fast each extra $100 or $200 a month moves the balance.

The payment-history rule that trips people up

Cancellation is not automatic just because the number is right. You must be current on the mortgage when the cancellation takes effect, and under federal rules you generally cannot have been seriously delinquent — a 60-day-or-later missed payment — during the 12 months before cancellation. Many servicers apply a stricter internal standard and will not act if you have had any 30-day late payment in the past year. A single missed payment in the wrong month can push your cancellation out by a full year, which on a $125 premium is another $1,500. Keep the account current in the 12 months before you plan to ask, and keep records of your request in writing.

None of this applies to FHA, VA, or USDA insurance. Those programs follow the schedules described above, and the 78% and 80% rules are specific to conventional loans with borrower-paid PMI.

Piggyback loans: the 80/10/10 math

A piggyback structure splits the financing into two loans so the first lien lands at exactly 80% LTV and no PMI is triggered: you put 10% down, borrow 80% as the first mortgage, and borrow the remaining 10% as a second lien. It is worth doing only when the numbers say so.

Take a $400,000 home with $40,000 down.

When it wins. With fair credit, where PMI runs 0.70%, the single loan costs $2,485 against the piggyback's $2,412 — $73 a month in the piggyback's favor, about $4,400 over the first five years. Second liens are priced for exactly this case: when PMI is expensive enough to beat a double-digit interest rate on a small balance.

When it loses. With strong credit, where PMI runs 0.45%, both structures land at $2,410 and $2,412 — a dead tie on the payment, and the piggyback still adds $1,000 to $2,500 of closing costs for nothing. Cumulative payments confirm it: assuming your home's value stays flat, the single loan is $3,616 cheaper by year 10 and $11,837 cheaper by year 15, because borrower-paid PMI ends at payment 95 — the 80% mark on a flat value — while the 10.5% second lien keeps running. Even in the fair-credit case the advantage reverses at month 146, roughly year 12, and the single loan finishes $4,712 ahead at year 15.

Before you sign a piggyback, check three things: whether the second lien is fixed or a variable-rate line of credit (a HELOC can reprice — model it with the HELOC calculator), whether you will still hold both loans past the crossover date, and whether you would rather keep the cash and simply plan around PMI removal. An 80/10/10 is a timing bet, not a free lunch.

Refinancing to remove PMI: the break-even test

If you cannot wait for the automatic date and you do not qualify for the 80% request — usually because your value has not moved — a refinance is the third route. It is also the most expensive, so run the break-even before you apply.

The formula is plain: cash cost of the refinance ÷ monthly savings, adjusted for any rate change. On a $330,000 balance with $165 of monthly PMI, closing costs of 2% come to $6,600. $6,600 ÷ $165 = 40 months. You need to keep the loan, and stay in the house, well past three and a half years for the trade to pay.

Then apply the rate test. The same $330,000 refinanced from 6.5% to 7.0% adds $110 a month to the payment, which eats most of the $165 premium you just eliminated: your real saving drops to $55 and the break-even stretches to about 119 months — nearly ten years. Refinancing to a lower rate flips it: at 6.25% the payment falls $54, your saving becomes $219, and the break-even compresses to about 30 months.

So the decision rule is short. Refinance to remove PMI only when the new rate is at or below your current rate, or when you can confirm the loan will not be sold or refinanced again within the break-even window. Otherwise request cancellation on current value, or pay the balance down to the threshold. Our refinance calculator computes the break-even month for your rate, balance, and cost assumptions.

Avoiding PMI

The best way to avoid PMI is to put down 20% or more. However, if that's not possible, consider:

• Piggyback Loans: Two loans totaling 80% to avoid PMI
• VA Loans: No PMI required for eligible veterans
• USDA Loans: No PMI, just a guarantee fee

The real decision is not "PMI or no PMI" — it is what the 20% costs you and what it saves. On a $400,000 home, putting 5% down means a $380,000 loan: principal and interest of $2,402 at 6.5% plus $143 of PMI at 0.45%, or $2,544 before taxes and insurance. Putting 20% down means an $80,000 cash requirement, a $320,000 loan, and a payment of $2,023 with no premium at all. That is $522 a month for $60,000 of extra cash.

• Put down 20% when it still leaves two to six months of housing payments in reserve, when your credit puts PMI in the 0.70%+ tiers, and when the alternative is paying rent while you save. The premium is gone on day one and your pricing improves at the same threshold.
• Put down less when reaching 20% would empty the accounts you need for the appraisal, moving costs, and the first year of repairs; when your PMI would price in the 0.30% to 0.45% range and you have a plan to request cancellation at 80%; or when VA or USDA eligibility makes the question moot. Run both cash scenarios through the mortgage calculator and compare the full PITI payment, not the loan amount.

Down payment strategy is a cash-flow question before it is an insurance question. Model the actual percentages with the down payment calculator before you decide what to hand the seller.

Common mistakes with PMI

Most PMI overpayment comes from a timing error or a wrong assumption, not from a bad rate. These are the eight that cost the most.

• Waiting for the servicer to notify you. Cancellation at 78% of original value happens without you, but the 80% request is one you initiate in writing. Never ask and you keep paying until the automatic date arrives, which in the example above is payment 135.
• Assuming extra payments move the automatic date. The 78% test runs on your original amortization schedule and original purchase price, so extra principal does nothing for it. Extra principal does accelerate the 80% request, which is the test you should actually be working toward.
• Missing one payment in the 12 months before you ask. A 60-day delinquency blocks cancellation outright under federal rules, and many servicers refuse if there was any 30-day late in the past year. One slip can cost a full year of premiums — about $1,500 at $125 a month.
• Paying for an appraisal you do not need. If your balance is already below 80% of the original purchase price, no new value is required. Check the closing disclosure first and keep the several hundred dollars.
• Expecting the payment to shrink as you pay down. The premium is calculated on your original loan amount, so the dollar figure stays flat until coverage ends. Your equity grows; the bill does not.
• Choosing an 80/10/10 on principle. At a 0.45% PMI rate the piggyback ties the single loan on payment and adds $1,000 to $2,500 of closing costs. It only earns its keep when your credit puts PMI in the expensive tiers or you will sell before the crossover.
• Refinancing into a higher rate to kill the premium. On a $330,000 balance, half a point costs $110 a month and turns a $165 saving into $55, stretching break-even from 40 months to about 119.
• Defaulting to FHA because it is easier to qualify. With 3.5% down, FHA mortgage insurance runs for the life of the loan; conventional PMI ends on a schedule. Qualifying is only half the cost comparison.