PMI explained: private mortgage insurance

If you're buying a home with less than 20% down on a conventional mortgage, you'll almost certainly pay private mortgage insurance (PMI). PMI is one of the most misunderstood components of a mortgage payment — borrowers often think it protects them, but it actually protects the lender. This guide explains exactly what PMI is, how much it costs, and how to remove it as quickly as possible.

What PMI actually is

PMI is an insurance policy that protects the lender against loss if the borrower defaults on the mortgage. It does not protect the borrower. Lenders require PMI when the borrower's down payment is less than 20% of the home's value because that scenario is statistically higher-risk: smaller down payment means the lender has less equity cushion if foreclosure becomes necessary.

The borrower pays the PMI premiums monthly as part of the mortgage payment, but the policy benefits the lender. This is a critical distinction — many borrowers initially assume PMI is somehow paying down their loan or protecting their family. It is not. It is risk insurance for the bank.

When PMI is required

PMI requirements depend on the loan type:

• Conventional loans (Fannie Mae / Freddie Mac): PMI required when down payment is below 20%. Can be removed once the loan reaches 80% loan-to-value (LTV).
• FHA loans: Use "MIP" (mortgage insurance premium) instead of PMI. Required regardless of down payment, often for the life of the loan if down payment is under 10%.
• VA loans: No PMI required, even with 0% down. The VA funding fee replaces it.
• USDA loans: Use a guarantee fee and annual fee instead of traditional PMI.

The rest of this guide focuses on conventional PMI, which is the most common scenario for home buyers.

How much does PMI cost?

PMI rates depend on three things: the loan-to-value ratio, your credit score, and the loan type. Typical annual PMI rates range from 0.3% to 1.5% of the loan amount.

How long does PMI last?

Under US federal law (the Homeowners Protection Act of 1998), PMI on conventional loans must be removed in three ways:

1. Automatic termination: Lenders must automatically terminate PMI when the loan reaches 78% loan-to-value (LTV) based on the original property value, as long as the borrower is current on payments.
2. Borrower-requested cancellation: Borrowers can request PMI cancellation when the loan reaches 80% LTV. The request must be in writing, and the lender may require an appraisal to confirm current value.
3. Mid-point termination: Lenders must terminate PMI at the loan's mid-point (e.g., year 15 of a 30-year loan) regardless of LTV, as long as the borrower is current on payments.

The path to 80% LTV — natural amortization

Reaching 80% LTV through normal monthly payments takes time. On a 30-year mortgage, here's the rough timeline for a borrower who started at 95% LTV (5% down):

Faster paths to PMI removal

You don't have to wait a decade. Several strategies accelerate PMI removal:

1. Make extra principal payments

Adding $100–300/month in extra principal payments can move you to 80% LTV in 6–7 years instead of 10. The PMI removal savings alone often justify the extra payments.

2. Lump-sum principal payment

An annual bonus, tax refund, or inheritance applied to principal can push you across the 80% LTV line years earlier than scheduled. Coordinate with your lender on the formal PMI removal request.

3. Order a new appraisal if home value rose

PMI removal at 80% LTV uses the original property value by default. But if home values in your area have appreciated significantly, you can request PMI removal based on a current appraisal. If your home is now worth $300,000 instead of the $250,000 you paid, your current balance of $228,000 is only 76% of the new value — eligible for removal even without significant principal reduction.

Lender requirements for appraisal-based PMI removal vary. Most require:

• The loan to be at least 2 years old (some require 5 years)
• A clean payment history
• Borrower to pay for the appraisal (typically $400–600)
• A formal lender-ordered appraisal, not a self-ordered one

4. Refinance into a non-PMI loan

If your equity has grown significantly, refinancing into a new loan at 80% LTV or below eliminates PMI by definition. This only makes sense if interest rates haven't risen materially since you took out the original mortgage. See our refinancing guide for break-even analysis.

PMI vs lender-paid mortgage insurance (LPMI)

Some lenders offer "Lender-Paid Mortgage Insurance" as an alternative to traditional PMI. With LPMI, the lender pays the PMI premium but charges you a slightly higher interest rate (typically 0.25–0.5% higher) for the life of the loan.

The trade-off:

• Traditional PMI: Higher monthly payment now (PMI + interest), but PMI ends in ~10 years and your payment drops permanently.
• LPMI: Lower monthly payment now (no PMI line item, just slightly higher rate), but the higher rate continues for the entire loan term — even after you'd have hit 80% LTV.

LPMI is usually better if you plan to refinance or move within a few years (because PMI hasn't dropped off yet anyway). Traditional PMI is usually better if you plan to keep the loan long-term (because eventually PMI drops off and the long-term payment is lower).

PMI tax deductibility

PMI premium tax deductibility has changed multiple times under US tax law and currently depends on adjusted gross income limits and the tax year. Consult a tax professional for your specific situation — this is not tax advice. As a general rule, do not assume PMI is deductible; verify with a CPA or tax software for the current tax year.

Common PMI scenarios

1. "Is it worth paying 20% down to avoid PMI?" Often yes if you can afford to. The avoided PMI plus the larger down payment saves significant money long-term. But it depends on whether keeping cash reserves matters more for your situation.
2. "Should I pay extra to remove PMI faster?" Yes, especially in the early years. The avoided PMI is essentially a guaranteed return on the extra principal payments — sometimes more valuable than other uses of the money.
3. "Should I refinance just to remove PMI?" Only if you can also lower your interest rate enough to justify the refinance closing costs. Removing PMI alone is not usually worth the refinance fees unless rates also dropped.
4. "What if my home value dropped?" PMI is harder to remove if your home depreciated. You may need to wait for either natural amortization or market recovery before removal becomes possible.

Frequently asked questions