What Is PMI?

Private mortgage insurance is the line on a mortgage estimate that homebuyers most often skip past, and one of the few costs on that page you can actually get rid of. It is worth understanding for two reasons: it changes what you can afford, and the rules for removing it are specific enough that many people pay it for longer than they need to.

The mortgage calculator adds PMI to the payment when the down payment is below 20%, so you can see the effect directly.

What PMI is

Private mortgage insurance is an insurance policy that protects the lender against loss if you default. If the loan goes bad and a foreclosure sale does not recover the outstanding balance, the insurer reimburses the lender for part of the shortfall.

You pay the premium. You receive no protection. This is the fact that surprises people, and it is worth stating plainly: PMI is not homeowners insurance, and it is not mortgage life insurance that pays off the loan if you die. It is protection for the institution lending you money.

That does not make it useless to you. Without PMI, lenders would simply decline to make loans with small down payments, or price them much higher. The insurance is what makes buying with less than 20% down possible at ordinary rates. You are paying for access, not for coverage.

When it applies

On conventional loans, PMI is generally required when your loan-to-value ratio exceeds 80% — that is, when your down payment is under 20% of the purchase price.

The ratio, not the deposit, is what matters. A $400,000 home with $80,000 down gives an LTV of 80% and avoids PMI. The same $80,000 on a $450,000 home leaves LTV above 82%, and PMI applies.

Government-backed loans work differently. FHA loans carry mortgage insurance premium (MIP) rather than PMI, with its own structure: an upfront premium plus an annual one, and on many current FHA loans the annual premium lasts the entire loan term regardless of how much equity you build. VA loans for eligible borrowers generally carry no monthly mortgage insurance at all, substituting a one-time funding fee. USDA loans have their own guarantee fee.

Those distinctions matter when comparing programs. An FHA loan with a low down payment can be cheaper to enter and more expensive to hold, precisely because the insurance never falls away.

How much it costs

PMI typically runs somewhere between about 0.3% and 1.5% of the loan amount per year, charged monthly. On a $320,000 loan, that spans roughly $80 to $400 a month — a wide range, and the position within it is not random.

Two factors dominate:

Credit score. The single largest driver. The spread between excellent and merely fair credit can more than double the premium.

Loan-to-value ratio. A 19% down payment costs far less to insure than a 3.5% one, because the lender's exposure is smaller.

Loan term, occupancy type, and whether the rate is fixed or adjustable also feed in, but to a lesser degree.

The four ways PMI is structured

Borrower-paid monthly PMI is the default: a premium added to your monthly payment, cancellable once you build equity. This is what most people mean by PMI and what the mortgage calculator models.

Single-premium PMI is paid as a lump sum at closing, sometimes financed into the loan. It lowers the monthly payment but is generally not refundable if you sell or refinance early.

Lender-paid PMI removes the separate line item by raising your interest rate instead. It looks cleaner on the statement, but because it is baked into the rate it cannot be cancelled when you reach 20% equity — you pay it for the life of the loan. This is the option most often misunderstood as "no PMI."

Split-premium combines a smaller upfront payment with a reduced monthly premium.

Getting rid of it

This is the practical heart of the topic, and the rules are more favourable than many borrowers realise.

Automatic termination. On most conventional loans, the servicer must terminate PMI automatically once the principal balance is scheduled to reach 78% of the original value, provided you are current on payments. This happens by itself, but only at 78% — not at 80%.

Borrower-requested cancellation. You can generally request cancellation once the balance reaches 80% of the original value. This is a request, not an automatic event, and it typically requires that you be current, have a good payment history, and sometimes that you pay for an appraisal. Requesting at 80% rather than waiting for 78% can save several months of premiums.

Cancellation based on current value. If your home has appreciated, or you have made improvements, the equity position may reach the threshold sooner than the amortization schedule alone implies. Lenders have their own requirements here, usually including a new appraisal and a minimum seasoning period, but it is worth asking.

Refinancing. If you now have 20% equity, refinancing into a new conventional loan eliminates PMI. Whether that is worthwhile depends on the rate and closing costs — the refinance calculator shows the break-even. For FHA borrowers whose MIP will never cancel, refinancing into a conventional loan is often the only route out.

Paying down principal deliberately. Extra payments reach the threshold sooner. The mortgage payoff calculator shows how much faster.

Advantages of accepting PMI

Waiting to save a full 20% can cost more than the insurance does. If home prices or rents rise while you save, the delay may exceed the premiums you avoided. Buying earlier with PMI and cancelling it later is frequently the better arithmetic.

PMI also preserves cash. Putting every available dollar into a down payment can leave you without reserves for closing costs, moving, and the repairs that arrive in the first year of ownership.

And it is temporary on conventional loans. Unlike interest, it has a defined end.

Disadvantages

It is money that builds no equity and buys you no protection — pure cost, unlike interest, which at least reflects the price of borrowing.

It reduces what you can afford, because lenders count it within your debt-to-income calculation. This is why the house affordability calculator treats the full housing cost rather than principal and interest alone.

Cancellation is not always automatic in practice. Servicers do not always act at 80%, and borrowers who do not ask can pay for months longer than necessary.

Common mistakes

Assuming it cancels on its own at 20%. Automatic termination is at 78%. Cancellation at 80% requires you to request it.

Choosing lender-paid PMI without understanding the trade. It is not free — it is built into a higher rate that lasts the whole loan, long after borrower-paid PMI would have ended.

Believing PMI protects the borrower. It does not. If you want protection for your family, that is life or disability insurance, a separate product entirely.

Assuming FHA MIP behaves like PMI. On many current FHA loans the premium never cancels, which changes the long-run comparison substantially.

Forgetting PMI when budgeting. Several hundred dollars a month is not a rounding error, and it affects both affordability and the loan you qualify for.

Practical tips

Ask for the PMI rate as a percentage and a dollar figure before committing, and compare it across lenders — it varies more between lenders than borrowers expect.

Improve your credit score before applying if you can. It affects the mortgage rate and the PMI premium simultaneously.

Calculate whether a slightly larger down payment crosses the 20% line. Going from 15% to 20% can eliminate the premium entirely, which is often a better use of cash than a marginal rate reduction.

Track your balance against the original value and diarise the month you expect to hit 80%. Then write to your servicer.

If your home has appreciated significantly, ask about cancellation based on current value rather than waiting for the schedule.

Where to go next

See the effect on your payment in the mortgage calculator, which adds PMI when the down payment falls below 20%. To understand where PMI sits among the four parts of a mortgage payment, read what is PITI. And to work out how quickly extra payments reach the cancellation threshold, use the mortgage payoff calculator.

This guide is educational and does not constitute financial advice. Consult a qualified professional or your lender about your own situation.