Private Mortgage Insurance: What PMI Costs and How to Get Rid of It

Private mortgage insurance (PMI) is required on conventional loans when the buyer puts down less than 20%. It protects the lender — not the borrower — against losses if the borrower defaults. Despite protecting the lender, the borrower pays for it. PMI typically costs 0.5% to 1.5% of the loan amount annually, charged as a monthly premium added to your mortgage payment. On a $350,000 loan at 1% PMI, that's $291 per month — money that builds no equity and provides you no direct benefit.

PMI exists because lenders consider low-down-payment loans riskier — there's less equity cushion before a declining market puts the loan underwater. From a practical standpoint, PMI makes homeownership accessible to buyers who can't save 20% upfront, particularly in high-cost markets where that threshold can represent $80,000 to $150,000. The cost is real, but so is the ability to buy a home years earlier than waiting for a full 20% down payment.

How PMI is priced and what affects your rate

PMI rates vary based on loan-to-value ratio (LTV), credit score, and loan type. A borrower with a 10% down payment (90% LTV) and a 760 credit score pays less than a borrower with 5% down and a 680 score. PMI rates are published in lender-specific rate tables; your loan officer can provide exact figures for your scenario. The premium shows up on your Loan Estimate in the 'Other Costs' section and is reflected in the monthly payment calculation.

Some lenders offer lender-paid PMI (LPMI), where they absorb the PMI cost in exchange for a slightly higher interest rate. The tradeoff: you avoid the explicit monthly charge, but the higher rate persists for the life of the loan, whereas standard PMI can be removed once you reach 20% equity. LPMI saves money if you plan to sell or refinance soon — before the equity threshold — but costs more over a longer holding period.

How to cancel PMI — the rules lenders don't always volunteer

The Homeowners Protection Act of 1998 gives borrowers the right to request PMI cancellation once they reach 20% equity based on the original purchase price (80% LTV based on original value). The lender must automatically cancel PMI when the loan balance reaches 78% of the original purchase price, as long as you're current on payments. These rules apply to loans originated on or after July 29, 1999. You don't have to wait for the automatic cancellation — you can request it when you believe you've crossed the 20% threshold.

If home values have appreciated significantly, you may reach 20% equity faster than your amortization schedule reflects — but the lender won't automatically use the new market value. To cancel PMI based on appreciated value, you typically need at least two years of on-time payments, a new appraisal at your expense (usually $300 to $600), and a formal written request. Some lenders have stricter internal policies. The request process is worth pursuing if home values in your area have risen significantly since purchase — it can eliminate hundreds of dollars in monthly costs immediately.

FHA mortgage insurance — different rules, harder to remove

FHA loans charge a different product: mortgage insurance premium (MIP), not PMI. FHA MIP includes an upfront premium of 1.75% of the loan amount (typically financed into the loan) plus an annual premium of 0.55% to 1.05% depending on the loan term and LTV. The key difference from conventional PMI: FHA MIP generally cannot be canceled for loans originated after June 3, 2013, unless you made a down payment of 10% or more — in which case MIP cancels after 11 years. For most FHA borrowers with less than 10% down, MIP stays for the life of the loan.

The standard strategy for removing FHA MIP: refinance into a conventional loan once you've reached 20% equity. If your credit score has improved since the original FHA loan — often the case for buyers who chose FHA due to a lower score — you may now qualify for a conventional loan at a competitive rate. Running the break-even calculation on the refinance costs versus the ongoing MIP savings will tell you whether and when it makes financial sense to make the switch.