Private Mortgage Insurance (PMI), Explained
PMI protects your lender, not you, and you pay for it when your down payment is under 20%. Here's what it costs and how to make it go away.
Private mortgage insurance is an extra monthly charge that kicks in when your down payment is under 20%, and it protects the lender — not you — if you default. It typically adds 0.3% to 1.5% of the loan amount per year to your payment, and the good news is that it’s temporary: once you’ve built enough equity, it comes off.
See exactly what PMI adds to your payment with the Mortgage Calculator with PMI.
What PMI is — and isn’t
PMI is insurance you pay for that pays your lender if you stop making payments and they foreclose at a loss. It does nothing for you directly; it simply makes the lender willing to approve a loan with less than 20% down. Think of it as the price of getting into a home before you’ve saved a full 20% deposit.
It’s easy to confuse with two other things:
- Homeowners insurance protects you against damage to the property. PMI doesn’t.
- Mortgage protection / life insurance pays off the loan if you die or become disabled. PMI doesn’t do that either.
PMI applies to conventional loans. FHA loans carry a similar but separate charge called MIP (mortgage insurance premium), which follows different rules and is often harder to remove.
When it’s required
The trigger is your loan-to-value ratio (LTV) — the loan balance divided by the home’s value. Put less than 20% down and your LTV starts above 80%, so lenders require PMI to offset the added risk.
| Down payment | Starting LTV | PMI required? |
|---|---|---|
| 5% | 95% | Yes |
| 10% | 90% | Yes |
| 15% | 85% | Yes |
| 20% | 80% | No |
The dividing line is 80% LTV / 20% equity. A larger down payment can push you under it and skip PMI entirely — see how the math shifts with the Down Payment Calculator.
What PMI costs
The annual premium usually runs 0.3% to 1.5% of the loan, set by your credit score, down payment and loan type. A weaker score and a smaller down payment both push the rate up. The premium is split into 12 and added to your monthly payment.
On a $300,000 loan at 0.6% per year:
- Annual PMI = $300,000 × 0.006 = $1,800
- Monthly PMI = $1,800 ÷ 12 = $150
That’s $150 on top of your principal, interest, taxes and insurance every month until it drops off. Over a few years it adds up to thousands — which is why removing it promptly matters. Fold it into your full payment with the Mortgage Calculator with Taxes & Insurance.
How and when PMI drops off
This is the part worth knowing precisely, because the rules differ depending on who acts. For conventional loans under the federal Homeowners Protection Act:
- 80% LTV — you can request cancellation. Once your balance reaches 80% of the home’s original value, you may ask your servicer in writing to cancel PMI. You’ll generally need to be current on payments and may need an appraisal to confirm value.
- 78% LTV — it cancels automatically. When your balance hits 78% of the original value, the servicer must remove PMI on its own, with no request needed.
- Halfway through the term — a backstop. If you’re somehow not at 78% by the loan’s midpoint, PMI must terminate then anyway.
You can reach the 80% threshold faster by paying down principal with extra payments, or — if local home values have risen — by getting a new appraisal and asking the lender to recognize the higher value. Both can knock PMI off years ahead of schedule.
How to avoid PMI entirely
If you’d rather not pay it at all, you have a few routes:
- Put 20% down. The cleanest fix — no PMI, a smaller loan and a lower payment.
- A piggyback (80-10-10) loan. A first mortgage for 80%, a second loan for 10%, and 10% down keeps the first mortgage at 80% LTV and avoids PMI — though the second loan carries its own (often higher) rate.
- Lender-paid PMI. The lender covers PMI in exchange for a higher interest rate. There’s no separate monthly line item, but you pay through the rate for the life of the loan, so it can cost more over time.
- Accept it, then cancel early. Sometimes buying now with PMI beats waiting years to save 20%, especially if home prices are climbing. Pay down to 80% and cancel as soon as you can.
A simple way to decide
If you can put 20% down without draining your emergency fund, do it and skip PMI. If you can’t, PMI is usually a reasonable cost for buying sooner — just treat it as temporary: track your balance, and the moment it hits 80% of the home’s original value, request cancellation in writing rather than waiting for the automatic 78% trigger.
Frequently asked
Is PMI tax-deductible? It has been deductible in some past tax years, but the rules change and phase out at higher incomes. Check current IRS guidance or a tax professional before counting on it.
Does a bigger down payment lower the PMI rate, not just remove it? Yes. Even if you stay under 20%, more money down lowers your LTV, which usually earns a lower PMI rate — so the premium shrinks even when it isn’t eliminated.
Will refinancing get rid of PMI? It can, if your new loan’s balance is at or below 80% of the current appraised value. But weigh the closing costs against simply requesting cancellation on your existing loan once you reach the threshold.
This guide is general educational information, not financial advice. Confirm specifics with a licensed lender or advisor.