PMI Explained: What Private Mortgage Insurance Costs and How to Remove It

If you buy a home with less than 20% down on a conventional loan, your lender will usually require private mortgage insurance, or PMI. Many buyers treat PMI as a penalty to avoid at all costs. In reality, it is a tool with a price tag. Paying PMI for a few years can make sense if it lets you buy sooner without draining your savings. The key is understanding what it costs, how long it lasts, and how to get rid of it.

What PMI is and who it protects

PMI protects the lender, not you. If you stop paying and the home is sold for less than the loan balance, the insurance covers part of the lender's loss. You pay the premium because your smaller down payment makes the loan riskier for the lender.

PMI applies to conventional loans. Government-backed loans have their own versions: FHA loans have mortgage insurance premiums (MIP), and VA loans have a funding fee instead of monthly mortgage insurance. USDA loans have guarantee fees.

How PMI is paid

The most common setup is a monthly premium added to your mortgage payment. Other options include:

• Single-premium PMI: paid upfront at closing, either by you, the seller, or rolled into the loan.
• Split-premium: part upfront, part monthly.
• Lender-paid PMI: the lender pays the insurance in exchange for a higher interest rate. This cannot be cancelled later because it is built into the rate.

What affects the cost

PMI pricing depends on several factors:

• Loan-to-value ratio (LTV). The smaller your down payment, the higher the premium.
• Credit score. Higher scores usually get much lower PMI rates.
• Loan term. 15-year loans may price lower than 30-year loans.
• Debt-to-income ratio and property type.

Annual PMI premiums commonly fall somewhere between a few tenths of a percent and over 1% of the loan amount per year, depending on those factors. Your lender will show the actual figure on your Loan Estimate.

Worked example (illustrative numbers only)

These figures are hypothetical, for illustration only.

You buy a $380,000 home with 10% down. Your loan is $342,000.

Assume an annual PMI rate of 0.50%:

• Annual PMI: $342,000 × 0.50% = $1,710
• Monthly PMI: about $142.50

Now, when does it end? On a conventional loan with borrower-paid monthly PMI, U.S. federal law (the Homeowners Protection Act) provides two key milestones based on the home's original value:

• Borrower-requested cancellation at 80% LTV. Here, 80% of $380,000 is $304,000. With an illustrative 6.75% 30-year rate and no extra payments, the balance would reach $304,000 in roughly 98 months, about eight years. You can request cancellation then if you meet the requirements, such as a good payment history and no junior liens.
• Automatic termination at 78% LTV. That is $296,400, reached after about 112 months, a little over nine years, as long as you are current on payments.

Extra principal payments reach those milestones sooner. In this example, total PMI paid over those roughly eight years would be about $14,000. That is the real price of buying with 10% down instead of 20% here.

Ways to remove PMI sooner

1. Make extra principal payments to reach 80% LTV faster, then request cancellation in writing.
2. Use rising home value. Some lenders allow cancellation based on a new appraisal if your home has appreciated, often with a minimum period of ownership and a stricter LTV requirement. Rules vary by investor and servicer, so ask yours.
3. Make improvements that add value, then request a new appraisal.
4. Refinance once you have at least 20% equity, if the overall rate and costs make sense.

Keep records and send cancellation requests in writing. Your servicer can explain the exact process and any appraisal it requires.

FHA mortgage insurance is different

FHA loans charge an upfront mortgage insurance premium plus an annual premium paid monthly. For many FHA loans, annual MIP lasts for the life of the loan if your down payment was less than 10%, and for 11 years if it was 10% or more. The main way to remove it is often to refinance into a conventional loan once you have enough equity. Check current FHA rules, because premiums and terms have changed over the years.

Is it worth paying PMI?

Waiting to save 20% has its own cost: more years of rent, possible changes in home prices, and changes in rates. PMI can be reasonable if:

• It lets you keep a solid emergency fund instead of putting every dollar into the down payment.
• You expect to reach 20% equity within a reasonable time.
• The monthly payment including PMI fits comfortably in your budget.

It may be worth waiting if PMI would be very expensive because of your credit score, or if the total payment would be a stretch.

FAQ

Does PMI go away automatically?

For borrower-paid PMI on a conventional loan, it generally ends automatically when your balance is scheduled to reach 78% of the original value, if you are current. You can usually request cancellation earlier at 80%. Lender-paid PMI and FHA MIP work differently.

Is PMI tax-deductible?

Deductibility of mortgage insurance premiums has changed several times under U.S. tax law. Check current IRS guidance or ask a tax professional for the year you are filing.

Can I avoid PMI with less than 20% down?

Options include lender-paid PMI (traded for a higher rate), VA loans for eligible borrowers, and some special programs. Each has trade-offs, so compare total costs rather than just the absence of a PMI line.

Estimate your payment with PMI

The Rateboard mortgage payment calculator includes PMI along with taxes, insurance, and HOA dues so you can see the full monthly cost at different down payment levels.

Rateboard guides are educational and are not financial advice. PMI terms depend on your loan; confirm with your lender and servicer.