What Is PMI? Private Mortgage Insurance Explained — And How to Avoid It
Private mortgage insurance (PMI) typically costs 0.5%–1.5% of the loan balance annually and is required when your down payment is below 20%. Here's how PMI works, how much it costs, and the four ways to avoid or cancel it.
Private mortgage insurance is one of those costs that catches first-time buyers off guard. You've saved for a deposit, budgeted the monthly payment — and then the lender adds another charge for an insurance policy that protects them, not you. Understanding what PMI is, exactly what it costs, and how to minimise it is one of the most practical things a prospective homebuyer can do before signing.
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What is PMI?
Private mortgage insurance is a monthly premium charged by your lender when you make a down payment of less than 20% on a conventional mortgage. It insures the lender — not you — against the financial loss if you default and foreclosure doesn't recover the full loan balance. The lender is taking more risk on a high-LTV loan; PMI compensates them for that risk by transferring it to an insurance company.
PMI applies specifically to conventional loans (those not backed by the US government). Government-backed loans have their own equivalents:
- FHA loans: Mortgage Insurance Premium (MIP) — both an upfront premium (1.75% of loan) and an annual premium (0.55%–1.05%). MIP on FHA loans originated after June 2013 typically lasts the life of the loan unless you put down 10%+ (in which case it cancels after 11 years).
- VA loans: No PMI; instead a one-time VA Funding Fee (1.25%–3.3% of loan amount, depending on down payment and service history).
- USDA loans: An upfront guarantee fee (1% of loan) plus an annual fee (0.35%).
How much does PMI cost?
PMI typically costs between 0.5% and 1.5% of the original loan amount per year, paid monthly. The exact rate depends on:
- Your credit score (higher score = lower PMI rate)
- Your loan-to-value ratio (closer to 80% LTV = lower rate)
- Loan type (fixed vs. adjustable, 15yr vs. 30yr)
- The specific insurer chosen by your lender
Example PMI costs on a $350,000 home
| Down payment | LTV ratio | Loan amount | Estimated PMI/yr (0.8%) | Monthly PMI |
|---|---|---|---|---|
| 3% ($10,500) | 97% | $339,500 | $2,716 | $226 |
| 5% ($17,500) | 95% | $332,500 | $2,660 | $222 |
| 10% ($35,000) | 90% | $315,000 | $2,520 | $210 |
| 15% ($52,500) | 85% | $297,500 | $2,380 | $198 |
| 20% ($70,000) | 80% | $280,000 | $0 | $0 |
At 0.8% on a $332,500 loan, PMI adds $222/month — over $2,600 per year — that builds zero equity and provides you no benefit whatsoever.
When does PMI end?
For conventional loans, the Homeowners Protection Act (HPA) of 1998 governs PMI cancellation. There are three key scenarios:
1. Automatic termination
Your lender is required by law to automatically cancel PMI when your loan balance reaches 78% of the original purchase price (not the current market value) — based on the original amortisation schedule. At a 5% down payment on a 30-year loan, this typically takes about 9–11 years.
2. Borrower-requested cancellation
Once your loan balance reaches 80% LTV based on the original value, you can request PMI cancellation in writing. The lender can require:
- A good payment history (no 30+ day late payments in the prior year; no 60+ day late payments in the prior two years)
- Written certification that the property value has not declined
- In some cases, an appraisal at your expense
If home values in your area have risen significantly, you may reach 80% LTV much sooner based on the current appraised value — but the lender can decline cancellation until you're at 80% of the original value unless you go through the appraisal route.
3. Midpoint cancellation
Regardless of LTV, the lender must cancel PMI when you reach the midpoint of the loan's amortisation schedule — the 180th payment on a 30-year loan — as long as you're current.
Important: These rules apply to conventional, conforming mortgages only. FHA MIP and non-conforming loans have different rules — check with your servicer.
4 ways to avoid PMI altogether
1. Put down 20%
The cleanest solution: save until you can make a 20% down payment. On a $350,000 home, that's $70,000. On a $500,000 home, it's $100,000. The tradeoff is a longer savings period — but you avoid a cost that could total $15,000–$25,000 over 7–10 years before your balance reaches 78% LTV.
2. Piggyback loan (80-10-10)
An 80-10-10 loan — also called a "piggyback" — splits the financing: a first mortgage covering 80% (no PMI), a second mortgage (typically a HELOC) covering 10%, and a 10% cash down payment. You avoid PMI entirely, though the second mortgage carries a higher interest rate. The calculation depends on the rate differential: if the second mortgage rate is materially higher than the PMI cost, the 80-10-10 may not save money.
3. Lender-paid PMI (LPMI)
Some lenders offer to pay PMI in exchange for a slightly higher interest rate — typically 0.25%–0.5% above the standard rate. The upside: no monthly PMI line item, and mortgage interest is tax-deductible (PMI may or may not be). The downside: the higher rate is permanent; once equity reaches 20%, the rate doesn't drop. Run the numbers carefully over your expected holding period.
4. VA loan (if eligible)
Eligible veterans, active-duty service members, and surviving spouses can use a VA loan with 0% down and no PMI ever. The one-time VA Funding Fee (waived for veterans with service-connected disabilities) is typically far less expensive than years of PMI payments.
Should you put down more to avoid PMI?
This is the right question — and the answer depends on your opportunity cost. If you could invest a $30,000 PMI-avoidance down payment chunk and earn 7%/year, that $30,000 grows to $59,000 in 10 years. The PMI you'd have paid on that same $30,000-smaller loan over 10 years might be $12,000–$18,000 in total. In that scenario, investing beats the extra down payment — but only if you have the discipline to actually invest (not spend) those funds.
Conversely, if carrying PMI would make your monthly payment uncomfortable, or if you're prone to lifestyle inflation with accessible savings, paying it down to 20% to eliminate the PMI burden may be the right psychological choice — even if it's not the mathematically optimal one.
Checking your current PMI status
If you already have a mortgage with PMI, check your annual mortgage statement or servicer's online portal. Look for:
- Your current loan-to-value ratio
- The date PMI is scheduled for automatic termination
- The date you can request early cancellation
If your home has appreciated significantly — as many US homes did in 2020–2023 — it may be worth ordering an appraisal. If the current value puts you below 80% LTV, you can formally request cancellation rather than waiting for the original amortisation schedule to catch up.
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The bottom line
PMI isn't a financial death sentence — for many buyers, making a smaller down payment and paying PMI for a few years is the right trade-off versus waiting years longer to save 20%. The key is understanding exactly what it costs, building a plan for cancellation, and not treating it as a permanent feature of your mortgage. For most buyers with 5–15% down, PMI lasts 7–11 years before automatic termination — treat it as a temporary cost of entry, not a fixed lifelong expense.