What Is PMI and How to Avoid It
Private mortgage insurance, or PMI, is one of the least-loved line items in homebuying — mainly because it costs you money each month while protecting someone else. If you've ever put less than 20% down on a conventional loan, you've probably paid it. Understanding exactly what PMI is, when you're stuck with it, and how to shed it can save you thousands over the life of a loan.
PMI is an insurance policy that protects the lender, not you. When a borrower brings a small down payment, the lender takes on more risk, because there's less of the borrower's own money in the deal if home values dip. PMI covers part of the lender's loss if you stop paying and the home goes to foreclosure. The borrower pays the premium, but the lender is the beneficiary.
When PMI Is Required
On a conventional loan, PMI is generally required whenever your down payment is below 20% of the home's value. The 20% threshold comes down to risk: at that level of equity, lenders consider the loan sufficiently cushioned to go without the added insurance. A 10% down payment usually means a smaller premium than a 3% down payment, because the borrower has more skin in the game.
Government-backed loans work differently. FHA loans carry their own insurance called the mortgage insurance premium, or MIP, which has different rules, and VA loans typically require no monthly mortgage insurance at all. So "PMI" specifically refers to the conventional-loan version — don't confuse it with the FHA or USDA programs.
What PMI Costs
PMI is priced as a percentage of your loan amount each year, and it's usually folded into your monthly payment. A typical range runs roughly 0.5% to 1.5% of the original loan balance annually, though the exact figure depends on your credit score, your down payment size, and the insurer's pricing. It can also be paid as an upfront premium or split between upfront and monthly amounts, depending on how the policy is structured.
As a rough illustration, on a $300,000 loan, an annual premium of 1% works out to $3,000 a year, or $250 a month — on top of your principal, interest, taxes, and insurance. That's real money, which is why borrowers are so eager to get rid of it. Keep in mind these are ballpark figures; your actual quote will come from the lender's rate sheet.
Automatic Termination and Requesting Cancellation
Federal law sets out when PMI must end on conventional loans. Under the Homeowners Protection Act, your lender generally has to cancel PMI automatically once your balance drops to 78% of the original home value, assuming you're current on payments. Separately, you can often request cancellation once you reach 80% loan-to-value, which may happen sooner through regular payments or home appreciation.
Don't wait passively for PMI to fall off. Track your loan-to-value ratio, and when you believe you've crossed 80%, ask your servicer in writing about cancellation — you may need an appraisal to prove the home's current value.
How to Avoid PMI in the First Place
The simplest way to skip PMI is a 20% down payment, but that's not realistic for every buyer, especially first-timers in pricey markets. Fortunately, there are several other routes:
- Put down 20%. No PMI at all, plus a smaller loan and lower monthly payment.
- Lender-paid PMI. The lender covers the premium in exchange for a slightly higher interest rate on your loan.
- A piggyback loan. A second mortgage (often a home equity line) covers part of the down payment so the first mortgage sits at or below 80% loan-to-value.
- A VA loan. Eligible veterans and service members can borrow with no monthly mortgage insurance, though a one-time funding fee usually applies.
Each option has a trade-off. Lender-paid PMI bakes the cost into your rate for the life of the loan, and a piggyback loan adds a second payment that may carry a higher rate. Run the numbers both ways with a calculator before deciding which route actually costs less over the time you plan to keep the loan.
PMI vs. FHA's MIP
It's worth repeating the distinction, because buyers frequently ask about "PMI" on an FHA loan. FHA loans charge an upfront MIP plus an annual MIP, and the rules for when it drops depend on your down payment and loan term — on many newer FHA loans, annual MIP lasts for the life of the loan. That makes it a different animal from conventional PMI, with its 78% automatic-cancellation rule.
The Consumer Financial Protection Bureau (CFPB) has plain-language guidance on mortgage insurance and how to estimate your costs, and it's a good place to check your rights around PMI cancellation. As always, your lender's Loan Estimate will show the specific mortgage insurance amount for your situation.
The Bottom Line
PMI isn't a scam and it isn't wasted money — it's the price of buying a home before you've saved a full 20% down, and for many buyers that's a sensible trade. But it's a recurring cost you should plan to exit. Whether that means paying down the balance, refinancing once you have equity, or simply asking your servicer to cancel it, knowing the rules puts you in control of when the premium stops.