What Is PMI (Private Mortgage Insurance)?

Private mortgage insurance (PMI) is a fee most conventional borrowers pay when they buy a home with less than a 20% down payment. It does not protect you — it protects the lender if you stop paying. Knowing when PMI applies, what drives its cost, and how to get rid of it can save you a meaningful amount over the life of a loan.

What PMI Actually Is

PMI is an insurance policy a lender requires on a conventional mortgage when the down payment is below 20% of the home's value. The lender buys the coverage from a private insurer, and you reimburse the cost — usually as a monthly add-on to your mortgage payment.

The reason comes down to risk. A borrower with little equity is more likely to default, and if the home is foreclosed and sold for less than the loan balance, the lender absorbs the shortfall. PMI covers part of that loss, which is why lenders approve small-down-payment loans at all.

A key point that trips people up: the premium comes out of your pocket, but the payout goes to the lender. PMI is not a substitute for homeowners insurance, life insurance, or mortgage protection insurance — those are separate products that protect you.

When PMI Is Required

PMI is tied to your loan-to-value ratio (LTV) — the loan amount divided by the home's value. A 20% down payment produces an 80% LTV, the threshold most conventional lenders use. Put down less than 20%, and you cross above 80% LTV, which generally triggers PMI.

It applies almost exclusively to conventional loans (those backed by Fannie Mae or Freddie Mac). Government-backed loans handle the risk differently:

• FHA loans charge a mortgage insurance premium (MIP) instead of PMI, with its own rules and a separate upfront fee.
• VA loans for eligible veterans typically charge a one-time funding fee rather than ongoing mortgage insurance.
• USDA loans use their own guarantee fee structure.

So "PMI" specifically refers to the private insurance on conventional loans. To see how a down payment changes your numbers, use our 3% vs 5% vs 20% down payment guide and the down payment calculator, and for the underlying math see loan-to-value ratio explained.

How Much PMI Costs

PMI is usually quoted as an annual percentage of the loan balance, then divided into monthly installments. The rate is not fixed across the market — it depends on factors the insurer prices for, including:

• Your down payment size (a 5% down loan generally costs more than a 15% down loan)
• Your credit score, often the largest single factor
• The loan type, term, and whether the property is a primary residence or investment
• Whether the rate is fixed or adjustable

Because these inputs vary by borrower and insurer, and because rates change over time, there is no single universal PMI figure. Treat any number you see online as illustrative, not a quote. To estimate the effect on a payment, run your scenario through a mortgage calculator and ask your lender for an actual quote tied to your credit profile.

How You Pay It

PMI is most commonly paid as borrower-paid monthly PMI (BPMI), folded into your monthly mortgage bill. Other arrangements exist:

• Single-premium PMI: one upfront lump sum (or financed into the loan) instead of monthly.
• Lender-paid PMI (LPMI): the lender covers the premium but builds it into a higher interest rate — which usually cannot be cancelled later because it is baked into the rate.
• Split-premium PMI: a partial upfront payment plus a smaller monthly amount.

How to Cancel PMI

The most important thing to know about borrower-paid PMI on a primary residence: it is temporary. U.S. federal law gives you specific cancellation rights under the Homeowners Protection Act of 1998, with three common paths:

1. Request cancellation at 80% LTV. Once your loan balance is scheduled to reach (or you can show it has reached) 80% of the home's original value, you can ask the servicer in writing to remove PMI. You generally need a good payment history and no junior liens.
2. Automatic termination at 78% LTV. By law, the servicer must automatically drop PMI once the balance reaches 78% of the original value, provided you are current on payments.
3. Reaching the midpoint of the loan term. If neither of the above has happened, PMI is generally removed at the loan's midpoint — for example, after 15 years of a 30-year loan — as long as you are current.

A fourth route is a new appraisal: if your home has appreciated or you have made improvements, an appraisal showing enough equity may let you cancel earlier under your servicer's guidelines. Note that the legal triggers above are based on the original value, while an appraisal-based request relies on current value, and each servicer has its own process — so confirm the requirements before paying for one.

Common PMI Pitfalls

A few mistakes show up repeatedly:

• Assuming PMI cancels itself the moment you hit 20% equity. Automatic termination is at 78% of original value, not 80%, and the servicer need not act early — you usually have to request the 80% cancellation yourself.
• Confusing PMI with FHA MIP. FHA mortgage insurance follows different rules and, in many cases, lasts the life of the loan unless you refinance — so do not expect it to drop like conventional PMI.
• Overlooking lender-paid PMI's hidden cost. LPMI removes the monthly line item but raises your rate permanently, so it can cost more over a long holding period even though the payment looks cleaner.
• Forgetting that PMI sits inside your payment. It is bundled with principal, interest, taxes, and insurance, so it is easy to lose track of. See what is escrow for how those pieces fit together.
• Letting PMI drive a stretch purchase. A small down payment plus PMI can make a pricier home look affordable on paper. Pressure-test the full picture with how much house can I afford first.

Is Paying PMI Worth It?

That depends on your goals and timeline. PMI lets you buy sooner rather than spending years saving a full 20% — and where home prices and rents are rising, buying earlier can offset the added cost. On the other hand, PMI is a recurring expense that builds no equity, so a larger down payment may make more sense. The right answer fits your budget, how long you plan to stay, and how quickly you expect to reach 20% equity.

This article is general educational information, not financial, tax, or mortgage advice. PMI rates, rules, and government-loan terms change over time and vary by lender. Confirm current figures and cancellation requirements with your loan servicer or a licensed mortgage professional.

Frequently Asked Questions