Is PMI Based on Appraised Value or Purchase Price?

PMI is based on the lower of your home’s appraised value or purchase price, not the higher of the two. Federal law calls that figure the “original value” of the property and defines it as the lesser of the contract sales price or the appraisal at the time of purchase.¹ That conservative number sets whether you owe PMI at closing, how your loan-to-value ratio is calculated, and when you’ll be able to drop the insurance later.

How the Lower Figure Sets Your LTV

When you apply for a conventional mortgage, the lender orders a professional appraisal to establish the home’s market value independently from what you agreed to pay. The lender then compares the appraised value to the contract price and uses whichever is lower to calculate your loan-to-value ratio.² If that LTV exceeds 80%, PMI is required.³

The reasoning is straightforward. Lenders don’t want to count equity that doesn’t exist. If you offered $400,000 for a home but a licensed appraiser says it’s worth $390,000, the lender treats the property as $390,000 of collateral. A $320,000 loan against that value produces an LTV of about 82%, triggering PMI even though your purchase contract alone might have implied a lower ratio.

The reverse scenario works the same way. If you’re buying at $390,000 and the appraisal comes back at $410,000, the lender still uses $390,000. You may have found a good deal, but the lender bases risk on what you’re actually paying, not what the property could theoretically sell for. Either way, the lower figure controls.

When the Appraisal Comes in Below the Purchase Price

A low appraisal is one of the more disruptive things that can happen during a home purchase. It increases your LTV ratio and creates a gap between what the lender will finance and what the seller expects. Lenders won’t lend more than the appraised value supports, so you have to cover any shortfall.

You generally have four options:

Renegotiate the price. Ask the seller to lower the purchase price to match the appraisal. In a buyer-friendly market this often works; in a competitive one the seller may refuse and move on.
Pay the difference out of pocket. If you still want the home, you can bring additional cash to closing to cover the gap between appraised value and contract price. That extra cash doesn’t count toward your down payment for LTV purposes. It just bridges the shortfall.
Walk away. Most purchase contracts include an appraisal contingency that lets you cancel without losing your earnest money if the appraisal falls short. If yours doesn’t, you may be at risk of forfeiting the deposit.
Dispute the appraisal. If you believe the appraiser missed comparable sales or made errors, you can challenge the valuation through the lender. This rarely reverses the result, but it’s worth pursuing if the comps clearly support a higher number.

Whatever you decide, your PMI requirement will be based on the appraised value, not the contract price. Paying a premium above appraised value adds cash to the deal without changing the LTV math at all.

Why the “Original Value” Follows You After Closing

The same lower figure used at closing becomes the benchmark for canceling PMI later. The Homeowners Protection Act gives you the right to request cancellation once your loan balance reaches 80% of the property’s “original value,” reached through either scheduled payments or extra principal.⁴ Original value is defined as the lesser of your purchase price or the appraised value at the time you bought.¹ It’s the same number the lender used to decide you needed PMI in the first place.

To exercise this right, you submit a written cancellation request to your mortgage servicer. The servicer verifies several conditions. You must have no payments 30 or more days late in the last 12 months, and no payments 60 or more days late in the last 24 months.⁵ You must be current. The mortgage holder may require evidence that the property’s value hasn’t dropped below the original value. And you must certify that no subordinate lien, such as a home equity loan or HELOC, encumbers your equity.⁶

This path doesn’t require your home to have appreciated. You’re demonstrating that you’ve paid the balance down far enough relative to the original value. The evidence the servicer asks for is just confirmation the property hasn’t lost value, which is a much lower bar than proving it’s worth more than when you bought it.

When Current Appraised Value Can Take Over

If your home has gained value since you bought it, you may be able to cancel PMI before your balance reaches 80% of the original value. This path uses the property’s current market value rather than the original value, and it’s governed by investor guidelines from Fannie Mae and Freddie Mac rather than the HPA itself.

Both agencies impose a seasoning requirement, meaning a minimum period you must have held the loan before requesting cancellation based on current value. The required LTV thresholds are tighter in the first few years:

Two to five years of seasoning: your current balance must be 75% or less of the home’s current appraised value.
More than five years of seasoning: your balance must be 80% or less of current appraised value.⁷⁸

Both agencies waive the two-year seasoning requirement if you’ve made substantial improvements that increased the property’s value, though you still need an LTV of 80% or less based on the new appraisal.⁷ Multi-unit and investment properties face stricter thresholds, with an LTV of 70% or less required after more than two years of seasoning.

You’ll need to pay for a new appraisal from a lender-approved appraiser. National averages run around $350 to $425 for a standard single-family home, though prices vary by location, size, and complexity. The same payment history requirements apply as under the HPA.⁷

Before ordering the appraisal, do the math. Divide your current balance by the value you think the home would appraise for. If that number isn’t comfortably below the required threshold, a disappointing appraisal just costs you a few hundred dollars with nothing to show for it. Online home value estimates can give you a rough sense, but they’re unreliable enough that building in a cushion of several percentage points is wise.

Automatic Termination Is Also Tied to Original Value

Even if you never request cancellation, your servicer must terminate PMI automatically when your loan balance is scheduled to reach 78% of the original property value, based solely on the initial amortization schedule.⁹ No paperwork, no appraisal, no request. The servicer tracks it and stops charging PMI on the first day of the month after the scheduled 78% date, as long as you’re current on payments.⁵ If you’re behind, termination kicks in the first month after you catch up.

One detail catches people off guard. “Scheduled to reach” means the lender looks at the original payment schedule, not your actual balance. If you’ve been making extra payments and your real balance is already below 78%, automatic termination doesn’t accelerate. It still follows the schedule. To benefit from extra payments, you need to proactively request cancellation at 80% using the process described above.

The HPA also sets a final backstop. If PMI hasn’t been canceled or automatically terminated by the midpoint of your loan’s amortization period, the servicer must end it then.⁶ For a 30-year mortgage, that’s the 15-year mark.

FHA Loans Don’t Follow These Rules

Everything above applies to conventional loans with private mortgage insurance. FHA loans have their own insurance system called a mortgage insurance premium, or MIP, and the rules are less borrower-friendly. For any FHA loan originated after June 3, 2013, with a down payment below 10%, the annual MIP remains for the life of the loan. It never goes away unless you refinance into a conventional mortgage, sell the home, or pay the balance off. If your down payment was 10% or more, MIP drops off after 11 years.

The Homeowners Protection Act does not apply to FHA insurance at all. There is no 80% cancellation request, no 78% automatic termination, and no midpoint backstop. If you have an FHA loan and want to escape the ongoing cost, refinancing into a conventional loan once you have enough equity is the usual route.

1
Office of the Law Revision Counsel. 12 U.S. Code 4901 – Definitions
2
Fannie Mae. Loan-to-Value (LTV) Ratios
3
Fannie Mae. What to Know About Private Mortgage Insurance
4
Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance (PMI) From My Loan?
5
Federal Reserve. Homeowners Protection Act
6
CFPB Consumer Laws and Regulations. Homeowners Protection Act (PMI Cancellation Act) Procedures
7
Fannie Mae. Termination of Conventional Mortgage Insurance
8
Freddie Mac. Guide Section 8203.2
9
Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance