Private Mortgage Insurance is a charge added to conventional mortgages with less than 20 percent down. It protects the lender, not the borrower, and it is governed by a specific federal statute that defines exactly when and how it can be removed. Understanding both pieces is what determines whether a borrower pays it for two years or twelve.
What PMI Is
PMI is an insurance policy the lender purchases and bills to the borrower on conventional mortgages where the loan-to-value ratio exceeds 80 percent. If the borrower defaults and the foreclosure proceeds do not cover the loan balance, the insurer reimburses the lender. The borrower receives no benefit from the policy itself.
PMI applies to conventional loans only. FHA loans use a separate program called MIP (Mortgage Insurance Premium), with different rules. VA loans carry no monthly mortgage insurance, only a one-time funding fee.
What It Costs
PMI typically runs 0.3 percent to 1.5 percent of the loan amount per year, billed monthly. The rate is driven primarily by:
- Credit score. The largest single factor. A 760+ score might pay 0.3 percent; a 620 score can pay 1.5 percent or more.
- Loan-to-value ratio. 95 percent LTV costs more than 90 percent, which costs more than 85 percent.
- Loan term. 30-year loans carry higher PMI rates than 15-year loans because the lender's exposure window is longer.
- Property type. Second homes, investment properties, and multi-unit buildings all carry higher PMI than primary single-family residences.
On a $400,000 loan at 0.6 percent PMI, the monthly charge is $200, or $2,400 per year. On a $700,000 loan at 1 percent PMI, it is roughly $580 per month.
Types of PMI
- Borrower-Paid Monthly (BPMI). The default. Paid as part of the monthly payment and removable once the loan reaches 80 percent LTV.
- Single-Premium (Upfront). A one-time payment at closing, often financed into the loan. Lower total cost for borrowers who hold the loan long-term; unrecoverable if the loan is sold or refinanced within a few years.
- Lender-Paid (LPMI). The lender pays the PMI and recovers it through a higher interest rate, typically 0.25 to 0.5 percent above par. Cannot be removed by reaching 80 percent LTV; only refinancing eliminates it.
- Split-Premium. Part upfront, lower monthly. Less common; useful in narrow circumstances.
Choosing among these depends primarily on the expected holding period for the loan. If a refinance is likely within a few years, LPMI's rate premium is recovered at the refinance and the upfront cost is avoided. For long-term holds, BPMI with a clear plan for early termination is usually the lower-total-cost option.
How to Cancel BPMI
The Homeowners Protection Act of 1998 defines three paths to removing borrower-paid PMI on conventional loans:
- Automatic termination at 78 percent LTV. When the principal balance reaches 78 percent of the original purchase price (or appraised value at origination, whichever was lower), the servicer must cancel PMI automatically, provided the loan is current. Calculation is based on the amortization schedule, not current market value.
- Borrower-requested cancellation at 80 percent LTV. Once the balance reaches 80 percent of the original value, the borrower can submit a written request and the servicer is required to cancel, again subject to current-payment status.
- Appreciation-based cancellation. If current market value has risen enough that the loan balance is 80 percent or less of current value, the borrower can request early cancellation. The servicer typically requires a new appraisal at borrower expense (around $500) and applies a seasoning requirement, commonly two years of payment history for the 80 percent threshold and five years for 75 percent.
In an appreciating market, the third path is the one that ends PMI in years two or three rather than year ten. Checking comparable sales annually and contacting the servicer when the math supports it is the standard playbook.
FHA MIP Rules Are Different
FHA mortgage insurance is not governed by the Homeowners Protection Act. Under rules in effect since 2013, MIP on most new FHA loans with less than 10 percent down lasts the life of the loan. The only way to remove it is to refinance into a conventional loan after building enough equity to qualify without PMI.
For that reason, FHA loans are commonly used as an entry path with the expectation of refinancing later, rather than as a long-term hold. Refinancing costs should be part of the total-cost calculation when comparing FHA against alternatives.
Avoiding PMI Entirely
Two common alternatives exist:
- Save 20 percent. The textbook answer. The cost of waiting depends on the local market: in an appreciating market, foregone appreciation can exceed what PMI would have cost over the same period.
- Piggyback structure (80/10/10): An 80 percent first mortgage, a 10 percent second lien, and 10 percent down. Avoids PMI but the second lien typically carries a higher rate; the all-in monthly cost often lands close to what PMI would have been. Run actual numbers from the lender on both structures before choosing.