What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) is a type of insurance that protects the lender, not the borrower, in case of default on a conventional mortgage loan. Lenders require PMI whenever a borrower makes a down payment of less than 20% of the home's purchase price, because a smaller down payment represents greater risk. PMI is provided by private insurance companies such as MGIC, Radian, Genworth, Essent, and National MI. The cost is added to your monthly mortgage payment and typically ranges from 0.5% to 1.5% of the original loan amount per year, depending on your credit score, loan-to-value ratio, and loan type. On a $285,000 loan (5% down on a $300,000 home), PMI at 0.8% costs approximately $190 per month. While PMI increases your housing costs, it also makes homeownership accessible to buyers who cannot save a full 20% down payment, which would be $60,000 on that same property.
How PMI Is Calculated
PMI rates are determined by two primary factors: your loan-to-value (LTV) ratio and your credit score. The higher your LTV (meaning a smaller down payment) and the lower your credit score, the more you pay. A borrower with a 760+ credit score and 90% LTV (10% down) might pay as little as 0.3% to 0.5% annually, while someone with a 640 credit score and 97% LTV could pay 1.2% to 1.5% or more. Lenders typically offer several PMI payment options: monthly premiums (the most common, added to your mortgage payment), single-premium PMI (a one-time upfront payment at closing, which may be financed into the loan), split-premium PMI (a smaller upfront payment combined with reduced monthly premiums), or lender-paid PMI (where the lender covers PMI but charges a higher interest rate for the life of the loan). Each structure has different long-term cost implications. Monthly PMI is usually the best choice if you plan to reach 80% LTV relatively quickly, while lender-paid PMI may benefit borrowers who prefer a slightly higher rate without a separate PMI line item. Use the calculator above to estimate your specific monthly PMI based on your down payment and credit tier.
When Does PMI Go Away?
Under the Homeowners Protection Act (HPA) of 1998, lenders are required to automatically cancel borrower-paid PMI when your loan balance reaches 78% of the original purchase price based on the amortization schedule, provided you are current on payments. You also have the right to request cancellation once your balance reaches 80% of the original value, though the lender may require a current appraisal to confirm the home has not declined in value. Additionally, PMI must be terminated at the midpoint of the loan term (after 15 years on a 30-year mortgage) regardless of LTV, as long as you are current. These rules apply to loans originated after July 29, 1999, on primary residences. For a $300,000 home purchased with 5% down at a 6.5% rate, reaching 80% LTV through regular payments alone takes approximately 7 to 8 years, meaning you could pay $15,000 to $20,000 in total PMI before cancellation. Making extra principal payments can accelerate this timeline significantly.
How to Avoid or Remove PMI
There are several strategies to avoid or eliminate PMI. The most straightforward is making a 20% down payment at purchase, which eliminates PMI entirely. If that is not feasible, consider a piggyback loan (also called an 80-10-10), where you take a first mortgage for 80% of the home price, a second mortgage or HELOC for 10%, and put 10% down. This avoids PMI on the first mortgage, though the second loan carries a higher interest rate. To remove existing PMI faster, make extra principal payments each month or year to reach the 80% LTV threshold sooner, then formally request cancellation from your servicer. If your home has appreciated significantly since purchase, you can request a new appraisal to demonstrate that your current LTV is below 80% based on the home's current market value, though lender policies on appreciation-based removal vary. Refinancing into a new loan at 80% LTV or lower also eliminates PMI, but closing costs must be weighed against the PMI savings. Finally, some lenders offer lender-paid PMI, which trades a visible monthly premium for a slightly higher interest rate, an option worth analyzing for long-term cost comparisons.
PMI vs FHA Mortgage Insurance
Private mortgage insurance on conventional loans and mortgage insurance premiums (MIP) on FHA loans serve the same purpose but differ in important ways. FHA loans charge two types of insurance: an upfront mortgage insurance premium (UFMIP) of 1.75% of the loan amount paid at closing, plus an annual MIP of 0.55% for most 30-year loans, paid monthly. Conventional PMI has no upfront component (unless you choose single-premium PMI) and rates vary based on credit score and LTV. The most critical difference is cancellation: conventional PMI can be removed at 80% LTV under the Homeowners Protection Act, while FHA MIP on loans with less than 10% down remains for the entire life of the loan. For borrowers who put 10% or more down on an FHA loan, MIP is removed after 11 years. This means that if you start with an FHA loan and want to eliminate mortgage insurance, you will likely need to refinance into a conventional loan once you reach 80% LTV. For borrowers with credit scores above 700, conventional loans with PMI are often cheaper over the long term than FHA loans with permanent MIP, even though FHA may offer a lower initial interest rate. The breakeven point depends on your specific credit score, down payment, and how long you plan to stay in the home.