PMI (Private Mortgage Insurance) Explained: Cost, How Long, How to Avoid

PMI lets you buy a home with less than 20% down — and lets you stop paying it the moment your loan balance hits 78% of the original value. Here's exactly how the math and the cancellation rules work.

TL;DR

• PMI exists because lenders need insurance against default on loans with less than 20% equity.
• Cost: Typically 0.20% to 1.50% of the loan balance per year, paid monthly.
• Cancellation: Automatic at 78% LTV (Homeowners Protection Act), or by request at 80% LTV with an appraisal.
• PMI is not FHA MIP. FHA mortgage insurance has different rules and often runs for the life of the loan.
• You can avoid PMI with 20%+ down, a piggyback loan, lender-paid MI, or VA/USDA eligibility.

What PMI actually is

Private mortgage insurance is an insurance policy paid by the borrower that protects the lender if the borrower defaults. It's only required on conventional loans with a loan-to-value (LTV) ratio above 80% — meaning the borrower put down less than 20%.

PMI is not for the borrower's benefit. It does not pay off the mortgage if you die, lose your job, or become disabled. It pays the lender a portion of the loss if the loan is foreclosed and the property sells for less than the balance owed. Without PMI, lenders would either decline high-LTV loans or charge much higher rates to absorb the risk themselves.

Because PMI shifts the default risk to the insurer, conventional 3%–5% down loans can be priced close to the rate on 20%-down loans. That's why PMI exists at all — it makes lower-down-payment ownership possible.

How much PMI costs

PMI pricing is risk-based. The two biggest inputs are credit score and LTV.

Approximate annual PMI rates for a fixed-rate conventional purchase, owner-occupied, single-family home:

| Credit score | 97% LTV | 95% LTV | 90% LTV | 85% LTV | | --- | --- | --- | --- | --- | | 760+ | 0.42% | 0.34% | 0.27% | 0.20% | | 720–759 | 0.57% | 0.46% | 0.36% | 0.27% | | 700–719 | 0.81% | 0.66% | 0.50% | 0.37% | | 680–699 | 1.07% | 0.85% | 0.66% | 0.49% | | 660–679 | 1.32% | 1.04% | 0.81% | 0.60% | | 640–659 | 1.55% | 1.22% | 0.95% | 0.71% | | 620–639 | 1.95% | 1.45% | 1.13% | 0.84% |

These are illustrative rates from major PMI providers; individual quotes vary. Always confirm pricing with your loan officer.

Worked example

A 720-credit borrower buying a $400,000 home with 5% down ($20,000):

• Loan amount: $380,000
• LTV: 95%
• Approximate annual PMI: 0.46%
• Annual PMI cost: $1,748
• Monthly PMI: about $146

That $146 is added to the monthly mortgage payment. It is not tax-deductible for most borrowers as of current tax law (the PMI deduction has expired and not been renewed by Congress in recent years; check current IRS guidance).

PMI vs. FHA MIP — they are not the same

A common confusion. The two products serve a similar function (insure the loan against default) but operate under different rules.

| Feature | Conventional PMI | FHA MIP | | --- | --- | --- | | Required on | Conventional loans, LTV >80% | All FHA loans | | Upfront premium | None | 1.75% of loan, financed | | Annual premium | 0.20%–1.50% (risk-based) | 0.55% (flat for most loans) | | Cancellation | At 78% LTV (auto) or 80% (request) | Life of loan if under 10% down; 11 years if 10%+ down | | Removable by paydown alone | Yes | No (only via refinance) | | Removable by appraisal | Yes, by request | No |

The cancellation difference is the most consequential. A conventional borrower pays PMI for roughly 5–10 years and then it stops. An FHA borrower with less than 10% down pays MIP for the entire life of the loan unless they refinance. See our FHA vs. conventional comparison for the lifetime cost math.

The 78% LTV automatic cancellation rule

The Homeowners Protection Act of 1998 (HPA) requires PMI to be automatically cancelled when:

• The loan balance reaches 78% of the original property value (purchase price or initial appraisal, whichever is less)
• The borrower is current on payments
• The cancellation date is calculated from the original amortization schedule, not the actual balance

That last point matters. If you've made extra principal payments and your balance is at 78% LTV in year 4 even though the schedule says you'd hit it in year 9, automatic cancellation does not trigger until year 9. The HPA's automatic rule is calendar-based, not balance-based.

The 80% LTV request cancellation

The same law lets a borrower request PMI cancellation at 80% LTV, regardless of the amortization schedule. To qualify:

• Submit a written request to the loan servicer
• Be current on payments
• Have a "good payment history" (no payment 30+ days late in last 12 months, no payment 60+ days late in last 24 months)
• Pay for an appraisal if the lender requires one (typically $500–$650)
• No subordinate liens (second mortgages or HELOCs) that push combined LTV above program rules

If your home has appreciated meaningfully, you can request PMI cancellation based on current market value, not the original purchase price. This is the "appreciation-based" cancellation path that's saved many borrowers thousands of dollars in markets that rose 20%+ in a few years.

Example: appreciation-based cancellation

A borrower bought at $400,000 with $20,000 down (5% down, $380,000 loan, 95% LTV). After three years:

• Loan balance: $362,000 (paid down $18,000)
• Current home value: $470,000 (appreciated)
• Current LTV: $362,000 ÷ $470,000 = 77%

The borrower can request cancellation, pay for an appraisal, and stop paying PMI well before the original schedule's 78% trigger date.

How to avoid PMI entirely

Option 1: 20% down

The simplest. With 80% LTV from day one, no PMI required. The math problem: 20% on a $400,000 home is $80,000, which is a multi-year savings goal for most first-time buyers.

Option 2: Piggyback loan (80/10/10 or 80/15/5)

A first mortgage at 80% LTV (no PMI required), plus a second-lien HELOC or fixed-rate second at 10%–15%, plus the borrower's 5%–10% down. The second-lien interest rate is higher, but the combined monthly cost can beat PMI for borrowers in higher PMI tiers (lower credit scores or higher LTVs).

Option 3: Lender-paid mortgage insurance (LPMI)

The lender pays the PMI premium upfront in exchange for a slightly higher interest rate (typically 0.125%–0.375% higher). No monthly PMI line item, but the rate is permanent — you can't cancel it by reaching 80% LTV. LPMI usually pencils out for borrowers who plan to refinance within 5–7 years or who have a high enough credit profile that the rate bump is small.

Option 4: VA loan (no PMI, ever)

Eligible veterans, active-duty service members, and surviving spouses pay a one-time VA funding fee (1.25%–3.3% depending on down payment and prior use) instead of monthly PMI. The funding fee is financed into the loan. Disabled veterans rated for service-connected disability are exempt from the funding fee. See our VA loan eligibility for surviving spouses guide.

Option 5: USDA loan

Zero down, no PMI. Instead, USDA charges a 1% upfront guarantee fee (financed) and a 0.35% annual fee paid monthly. Cheaper than conventional PMI in most cases but limited to eligible rural and suburban areas with household income caps.

Option 6: Doctor, lawyer, or professional loans

Some banks offer specialty programs for high-income professionals (typically medical residents, attorneys, CPAs) that waive PMI at low down payments. Income and credit requirements are tight, and the offer is bank-specific.

When PMI is worth it

PMI is often economically rational even when borrowers have the cash to put 20% down. A rough framework:

• Keep PMI: If you can put 20% down but it would drain emergency reserves below 3–6 months of expenses, the security of liquid savings outweighs the PMI cost.
• Keep PMI: If the market is rising faster than your PMI rate (e.g., 5% appreciation vs. 0.5% PMI), the equity gain from buying sooner often exceeds the total PMI you'll pay before cancellation.
• Pay it off: If you're already at 20%+ equity through appreciation, request cancellation immediately.
• Refinance to drop: If rates have fallen enough to refinance at a meaningfully lower rate and you've crossed 80% LTV, you'll drop PMI as part of the new loan structure.

What lenders won't proactively tell you

Two practices to know:

1. Servicers do not always notify you when your scheduled 78% date arrives. Federal law requires automatic cancellation, but the easiest way to enforce it is to mark your calendar and follow up.
2. Servicers may try to require a long list of conditions to honor an 80% request (multiple appraisals, attorney letters, etc.). HPA defines the minimum requirements; anything beyond an appraisal and a current-on-payments check is usually negotiable.

If your servicer refuses a legitimate cancellation request, file a complaint with the Consumer Financial Protection Bureau. They take HPA violations seriously.

Sources & verification

• Consumer Financial Protection Bureau — PMI rules and rights
• Homeowners Protection Act of 1998 (text)
• Fannie Mae Selling Guide — MI requirements
• IRS Publication 936 — Home Mortgage Interest Deduction
• NMLS Consumer Access

Disclosure

MLO Finder is a directory of mortgage loan officers, not a lender. We don't originate loans, set rates, or guarantee approval. Verify any loan officer's current licensing through NMLS Consumer Access before working with them. Information here is educational and not personalized financial advice — consult a licensed loan officer or financial planner for guidance specific to your situation.