Private mortgage insurance, or PMI, is a policy your lender requires on a conventional mortgage when you put down less than 20 percent, and understanding how PMI works comes down to three things: it protects the lender rather than you, you pay for it as part of your monthly mortgage payment, and federal law lets you cancel it once you’ve built enough equity in the home. On a $300,000 loan, PMI typically adds $115 to $375 to your monthly payment until you reach the cancellation point.
What PMI Is and Who It Protects
The Homeowners Protection Act defines PMI as insurance “against the nonpayment of, or default on, an individual mortgage or loan involved in a residential mortgage transaction.”1Office of the Law Revision Counsel. 12 USC 4901 – Definitions That language matters because it clarifies the purpose. If you stop making payments and the lender forecloses at a loss, the insurer covers part of the shortfall. You pay the premiums, but the coverage runs to the lender.
PMI exists so lenders can offer conventional mortgages to borrowers who haven’t saved a full 20 percent down payment. Without it, low-down-payment conventional lending would be much harder to get. The tradeoff is that you carry an extra cost every month until your equity reaches the threshold the law sets.
When You Have to Pay PMI
Any time your down payment on a conventional mortgage is less than 20 percent, the lender will require PMI. The math centers on your loan-to-value ratio (LTV), which is your mortgage balance divided by the home’s appraised value. Put down 15 percent on a $400,000 home and your LTV is 85 percent, so you’ll carry PMI. Put down 20 percent and your LTV is 80 percent, which clears the threshold.
How PMI Is Paid
Premiums reach the insurer through one of several structures, and the one you choose affects both your monthly payment and your ability to cancel later.
Borrower-Paid Monthly Premiums
The most common arrangement splits the annual premium into twelve monthly installments added to your mortgage payment. Your servicer typically holds this amount in escrow alongside property taxes and homeowner’s insurance. No large upfront cost, and you stop paying the moment PMI is canceled or terminated.
Upfront and Split Premiums
Some borrowers pay the entire premium as a lump sum at closing. This eliminates the monthly charge, but the cash is gone whether you sell the house in two years or twenty. A split premium combines a smaller upfront payment with reduced monthly installments. Both approaches lower your ongoing payment, but they tie up cash that might be better used elsewhere, especially if you expect to hit the cancellation threshold within a few years.
Lender-Paid Mortgage Insurance
With lender-paid mortgage insurance (LPMI), the lender buys the policy and recovers the cost by charging you a higher interest rate. Your monthly statement shows no separate PMI line item, but the cost is baked into every payment for the life of the loan. Federal law states that LPMI “only terminates when the transaction is refinanced, paid off, or otherwise terminated.”2NCUA. Homeowners Protection Act (PMI Cancellation Act) If you choose LPMI, the only way out is refinancing into a new loan, which carries its own closing costs. For long-term homeowners, borrower-paid monthly PMI is almost always the better deal.
What PMI Costs
Annual PMI premiums generally fall between 0.46 percent and 1.50 percent of the original loan amount. On a $300,000 mortgage, that translates to roughly $1,380 to $4,500 per year, or $115 to $375 per month. The spread is wide because insurers price each policy based on several risk factors.
Credit score is the biggest driver. Borrowers with scores of 760 or higher pay roughly 0.46 percent annually, while those in the 620 to 639 range face rates around 1.50 percent. Someone with weaker credit could pay more than triple what a high-score borrower pays for identical coverage on the same loan amount. Even a modest score improvement before applying can meaningfully reduce your premium.
Down payment size is the other major factor. A borrower putting 15 percent down represents less risk than someone putting down 5 percent, and the premium reflects that. Loan type matters too. Fixed-rate mortgages tend to receive slightly better PMI pricing than adjustable-rate mortgages.
Requesting Cancellation at 80 Percent
You have a legal right to request cancellation of borrower-paid PMI once your loan balance reaches 80 percent of the home’s original value. “Original value” means the lesser of the purchase price or the appraised value at the time you bought the home. If you’ve refinanced, it means the appraised value at the time of the refinance.3Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance (PMI) From My Loan
To cancel, you must meet four conditions in the Homeowners Protection Act:4Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance
- You must ask your servicer in writing to cancel the coverage.
- You need a good payment history: no payment 30 or more days late in the past 12 months, and no payment 60 or more days late in the 12 months before that.1Office of the Law Revision Counsel. 12 USC 4901 – Definitions
- You must be current on payments when you make the request.
- You must certify that no junior liens (like a home equity loan) are on the property and provide evidence that the home’s value hasn’t dropped below its original value. The lender may require an appraisal to verify this.
You don’t have to wait for the amortization schedule to get you to 80 percent. Make extra principal payments and hit the threshold early, and you can submit your written request at that point.1Office of the Law Revision Counsel. 12 USC 4901 – Definitions
Automatic and Final Termination
Even if you never submit a written request, the law requires your servicer to end PMI at two backstop points.
Automatic termination kicks in when your loan balance is scheduled to reach 78 percent of the original value based on the amortization schedule. Your servicer must drop the coverage on that date without any action from you, as long as you’re current on payments.4Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance Notice the gap: you can request cancellation at 80 percent, but if you don’t, the automatic cutoff doesn’t arrive until 78 percent. On a 30-year mortgage that gap can mean an extra year or two of premiums, which is why submitting the written request at 80 percent is worth the effort.
Final termination happens at the midpoint of your loan’s amortization period. For a 30-year mortgage that’s year 15. Even if your balance hasn’t reached 78 percent by then, PMI must end as long as you’re current.4Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance This provision mainly protects borrowers on interest-only loans or loans with very slow amortization.
After cancellation or termination, your servicer must return any unearned PMI premiums within 45 days.5CFPB. Homeowners Protection Act (PMI Cancellation Act) Procedures
Canceling Earlier Through Home Appreciation
The statutory cancellation rules are based on your home’s original value, not its current market value. If your home has gained significant value since you bought it, you may be able to remove PMI sooner by requesting a new appraisal. This path follows investor guidelines from Fannie Mae and Freddie Mac rather than the Homeowners Protection Act itself, and the equity thresholds are stricter.
Under Fannie Mae’s servicing guidelines for a primary residence or second home:6Fannie Mae. Termination of Conventional Mortgage Insurance
- If the loan is 2 to 5 years old, your current LTV must be 75 percent or less (25 percent equity based on the new appraised value).
- If the loan is more than 5 years old, your current LTV must be 80 percent or less (20 percent equity).
- For investment properties, your current LTV must be 70 percent or less after at least two years.
You’ll pay for the appraisal out of pocket, typically $350 to $550 for a single-family home. If it comes in lower than you expected, you’ve spent the money with nothing to show for it, so this strategy works best when comparable sales in your area clearly support the value you need.
A Few Boundaries Worth Knowing
PMI applies only to conventional loans. FHA loans carry a different product called a mortgage insurance premium (MIP), which follows separate rules: with a down payment under 10 percent, MIP stays for the life of the loan and can only be removed by refinancing into a conventional mortgage.7HUD. Appendix 1.0 – Mortgage Insurance Premiums Don’t assume the cancellation rights above apply to an FHA loan; they don’t.
Loans classified as “high risk” at origination can be held to a stricter termination point, with the balance required to reach 77 percent of the original value rather than 78.4Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance If your loan was flagged that way at closing, your servicer should have disclosed it.
PMI is no longer tax-deductible. Congress has let the deduction lapse and renewed it multiple times in the past, so check IRS Publication 936 for current status when you file.8Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction For now, PMI premiums are a pure out-of-pocket cost with no tax offset.
Finally, your servicer is required to send you a written statement every year explaining your right to cancel or terminate PMI, with a phone number and address to start the process.9Office of the Law Revision Counsel. 12 USC 4903 – Disclosure Requirements If those notices aren’t arriving, contact your servicer directly. They’re a useful annual prompt to check whether you’ve hit 80 percent and can file your written request.