PMI in plain English
Private mortgage insurance (PMI) can allow a borrower to obtain a conventional mortgage with less than 20% down. A private insurer covers part of the lender's loss if the borrower defaults.
PMI does not protect the borrower from foreclosure, make missed payments, or insure home value. The borrower pays for coverage that benefits the lender because the loan begins with less equity.
PMI is not the same as homeowners insurance, mortgage life insurance, or FHA mortgage insurance. Each serves a different purpose and follows different cancellation rules.
When PMI is required
PMI is commonly required when a conventional purchase mortgage has an LTV above 80%, often corresponding to less than 20% down. A conventional refinance can also require PMI when equity is below 20% of the value used for underwriting.
The exact requirement depends on lender, investor, loan program, credit profile, property, and coverage arrangement. Some “no PMI” loans use lender-paid insurance, a higher interest rate, a second mortgage, or portfolio pricing instead of a visible monthly premium.
No separate PMI line does not mean the risk is covered for free.
How PMI is priced
Pricing can depend on:
- LTV and down payment;
- credit score and history;
- loan type and term;
- fixed or adjustable rate;
- occupancy and property type;
- number of borrowers;
- debt-to-income ratio; and
- selected coverage and premium structure.
The annual premium can be converted to a monthly amount:
Approximate monthly PMI = loan balance × annual PMI rate ÷ 12
Actual premiums can use original amount, current balance, annual renewal schedules, or insurer rules. Use the Loan Estimate and closing documents.
Ways PMI can be paid
Borrower-paid monthly PMI is added to the monthly mortgage payment.
Single-premium PMI is paid upfront or financed. Financing raises principal and interest, and an upfront premium may not be fully refundable after sale or refinance.
Lender-paid mortgage insurance means the lender pays the insurer and recovers cost through a higher rate or pricing. It generally cannot be canceled from the payment the same way as monthly borrower-paid PMI because it is embedded in the rate.
Split-premium PMI combines an upfront amount with smaller monthly premiums.
Compare cash, rate, APR, monthly payment, cancellation path, and expected holding period for each structure.
Borrower-requested cancellation at 80%
For many covered mortgages on single-family principal residences closed on or after July 29, 1999, the Homeowners Protection Act gives borrowers a right to request cancellation when the principal balance is scheduled to reach 80% of the home's original value.
The CFPB explains that a borrower can also request earlier cancellation after extra principal payments reduce the actual balance to 80% of original value.
Typical conditions include:
- a written request;
- current payments;
- good payment history;
- certification that no subordinate lien exists; and
- evidence, if required, that property value has not declined below original value.
“Original value” generally means the lower of purchase price or appraisal at purchase; for a refinance, it generally means the appraisal value at refinancing. Consult the PMI disclosure and servicer.
Automatic termination at 78%
For many covered, non-high-risk mortgages, the servicer generally must automatically terminate borrower-paid PMI on the date the principal balance is scheduled to reach 78% of original value, provided the borrower is current.
This is based on the amortization schedule, not current appraised value and not necessarily the date extra payments cause actual balance to hit 78%. If the borrower is not current, termination can be delayed until payments are brought current.
Final termination generally applies by the month after the midpoint of the amortization period for covered loans when PMI has not already ended, subject to being current.
These federal rules have exceptions and do not describe FHA or VA programs.
Cancellation based on current value
Fannie Mae, Freddie Mac, lenders, and servicers may offer cancellation based on current property value under their own standards. Requirements can include a seasoning period, payment history, appraisal or valuation, and a lower LTV threshold when the loan is newer.
Home appreciation alone does not automatically remove PMI. Request the servicer's written current-value policy before paying for an appraisal.
Improvements can support value but receipts do not establish market value by themselves. The servicer determines acceptable evidence under applicable rules.
PMI versus FHA mortgage insurance
FHA loans use mortgage insurance premiums (MIP), not conventional PMI. FHA can charge an upfront premium and annual premiums collected monthly. Duration depends on origination date, original LTV, and current FHA rules.
The conventional HPA cancellation rights described above do not simply transfer to FHA MIP. A borrower might need to pay the FHA loan according to its terms or refinance into a qualifying conventional loan to eliminate ongoing MIP, and refinancing is not always economical or available.
VA loans generally use a funding fee rather than monthly PMI, with exemptions for some eligible borrowers. USDA loans have program guarantee fees. Compare program-specific costs.
PMI versus homeowners insurance
Homeowners insurance protects against covered damage and liability under the policy and is generally required by the mortgage contract. PMI protects the lender from part of the borrower's credit default risk.
Paying PMI does not repair a roof, replace belongings, or provide liability coverage. Paying homeowners insurance does not satisfy a PMI requirement.
Both may be collected through escrow, which can make them appear together on a statement.
The cost tradeoff
PMI can allow earlier home purchase and preserve cash. The cost includes the premium, interest on a larger loan, and greater leverage.
Waiting to save 20% can avoid PMI but exposes the buyer to rent, future prices, rate changes, and the opportunity cost of delaying. Buying sooner can work well or poorly depending on affordability and market outcome.
Compare scenarios using actual offers:
- monthly payment including PMI;
- cash remaining after closing;
- expected cancellation date;
- interest rate and APR;
- total cost over the expected holding period; and
- downside if value falls or income changes.
Paying extra principal to remove PMI
Additional principal can move the actual balance toward the 80% borrower-request threshold. Confirm that the servicer applies money to principal and ask for its cancellation process.
Do not send a large payment assuming PMI ends automatically the next month. A written request, good payment history, lien certification, and valuation evidence may still be required.
Compare prepayment with emergency savings and higher-rate debt. Home equity is not immediately spendable without selling or borrowing.
Refinancing to remove PMI
A refinance pays off the old mortgage with a new loan. If current equity supports an acceptable LTV, the new conventional loan may not require PMI.
But refinancing adds closing costs, underwriting, appraisal risk, and a new rate and term. Replacing a low-rate mortgage merely to save PMI can increase total cost.
Calculate:
Refinance break-even months = net refinance costs ÷ monthly savings
Also compare balance, years remaining, cash paid, and interest over the expected holding period. A lower payment caused by restarting a 30-year term is not pure savings.
How to review PMI documents
At closing, covered borrowers receive disclosures describing cancellation and automatic termination. Keep these with the note and Closing Disclosure.
Review statements for:
- current principal balance;
- original value used;
- scheduled 80% and 78% dates;
- premium amount and payment method;
- servicer contact; and
- whether the loan is conventional, FHA, VA, or USDA.
Send cancellation requests through a traceable channel and keep proof. If the servicer denies the request, ask for the specific reason and applicable investor or legal standard.
Common PMI mistakes
Do not assume PMI protects equity, cancels solely because a home appreciated, or always disappears at exactly 20% current equity.
Do not confuse borrower-paid and lender-paid coverage. Do not order an appraisal before confirming the servicer's acceptable valuation process. Do not refinance without comparing all new costs.
PMI is best treated as a financing tool with an exit plan. Know the premium, legal and investor cancellation standards, projected dates, and the economic alternative before choosing the loan.