What Is PMI — and How Do You Get Rid of It?

Private mortgage insurance (PMI) is required on conventional loans when your down payment is less than 20%. It insures the lender — not you — against losses if you default. From a buyer’s perspective, it’s a cost with a finite life and a definitive exit path.

Why PMI Exists

From the lender’s perspective, a borrower with less than 20% equity in a home represents higher risk. If the borrower defaults and the home sells for less than the loan balance — which is more likely when there’s little equity cushion — the lender takes a loss.

PMI transfers that risk to an insurance company. The borrower pays the premiums; the insurer compensates the lender if a covered default occurs.

What PMI Costs

PMI rates typically range from 0.5%–1.5% of the loan amount per year, added to your monthly payment. The specific rate depends on:

• Your credit score (higher score = lower PMI rate)
• Your loan-to-value ratio (lower LTV = lower PMI rate)
• Loan type and term
• The PMI provider the lender uses

Monthly PMI cost examples:

For a buyer with a 720 credit score putting 10% down on a $400,000 home, PMI might run $200–$280/month. For a buyer with a 640 score and 5% down, it could be $350–$450/month.

How PMI Is Paid

Most buyers pay PMI as a monthly addition to their mortgage payment. Some lenders offer alternatives:

Single-premium PMI: Pay the entire PMI cost upfront at closing (either as cash or rolled into the loan balance). This eliminates the monthly charge but requires a significant lump sum.

Lender-paid PMI (LPMI): The lender covers the PMI cost in exchange for a higher interest rate. The rate increase is permanent — unlike standard PMI which is cancelable — so this only makes sense for buyers who expect to sell or refinance before the rate premium adds up to more than the PMI cost would have been.

When PMI Ends (the 4 Exit Paths)

1. Automatic cancellation at 78% LTV: By law, lenders must automatically cancel PMI when your loan balance reaches 78% of the original purchase price, based on your scheduled amortization. No action needed.

2. Requested cancellation at 80% LTV: You can formally request PMI cancellation once you reach 80% LTV based on the original purchase price. You generally need a good payment history and no subordinate liens.

3. Appraisal-based cancellation: If your home has appreciated, a new appraisal may establish current value that shows 20% equity. Many lenders allow cancellation with a borrower-ordered appraisal (typically $300–$600), subject to seasoning requirements (often 2–5 years of ownership).

4. Refinance: Refinancing when you have 20% or more equity in current-market-value terms produces a new loan that doesn’t require PMI, as long as the new LTV is 80% or below.

For the full explanation of each path, see How to Remove PMI From Your Mortgage.

PMI vs. FHA MIP: A Key Distinction

FHA loans have mortgage insurance premium (MIP), not PMI. The differences are significant:

For buyers who can qualify for conventional financing, PMI’s cancelability is often a decisive advantage over FHA’s lifetime MIP — even if the FHA rate is slightly lower.

Is PMI “Throwing Money Away”?

Only if you never get to cancellation. If you buy with 10% down and reach 20% equity in 5 years through payments and appreciation — canceling PMI — you paid roughly $15,000–$20,000 in premiums and now own a home free of that charge. Compare that to 5 years of rent with no equity accumulated.

The calculation depends on appreciation, your specific PMI cost, and how long you stay in the home. For most buyers in normal markets, PMI is a time-limited cost of entry — not a permanent drain.

Use the Affordability Calculator to model your full PITI including PMI at different down payment amounts and see how the payment changes as you approach the 20% equity threshold.