If you bought a home with less than 20% down, there is a good chance you are paying private mortgage insurance (PMI) every month — and it is costing you more than you might realize. PMI protects the lender, not you, yet you are the one paying for it. The good news is that PMI is not permanent, and there are several ways to eliminate it faster than you think.
This guide explains exactly what private mortgage insurance is, how much it costs, how it differs from FHA mortgage insurance, and the most effective strategies to cancel it and reclaim that money for your own financial goals.
Key Takeaways
- PMI is required on conventional loans when the down payment is less than 20%.
- PMI typically costs 0.5% to 1.5% of the loan amount per year — $100 to $300+ per month.
- You can request PMI cancellation once you reach 20% equity based on the original purchase price.
- PMI automatically terminates when your loan balance reaches 78% of the original home value.
- A new appraisal showing increased home value can help you cancel PMI earlier.
What Is PMI and Why Do Lenders Require It?
Private mortgage insurance is a policy that protects the lender — not the borrower — in the event of default. When a buyer puts down less than 20%, the lender takes on more risk. PMI compensates the lender for that additional risk by paying out a claim if the borrower defaults and the home sells for less than the outstanding loan balance.
PMI is required on conventional loans with less than 20% down. It is arranged by the lender and paid by the borrower, either as a monthly premium added to the mortgage payment, an upfront lump sum at closing, or a combination of both.
How Much Does PMI Cost?
PMI premiums typically range from 0.5% to 1.5% of the original loan amount per year, depending on your credit score, loan-to-value ratio, and loan type. The higher your credit score and the more you put down, the lower your PMI rate.
| Loan Amount | PMI Rate | Annual PMI Cost | Monthly PMI Cost |
|---|---|---|---|
| $250,000 | 0.5% | $1,250 | $104 |
| $300,000 | 0.75% | $2,250 | $188 |
| $350,000 | 1.0% | $3,500 | $292 |
| $400,000 | 1.25% | $5,000 | $417 |
PMI vs. FHA Mortgage Insurance: Key Differences
Many buyers confuse PMI with FHA mortgage insurance premiums (MIP). They serve a similar purpose but work very differently. Conventional PMI can be cancelled once you reach 20% equity. FHA MIP, on the other hand, lasts for the life of the loan if your down payment was less than 10% — making it significantly more expensive over time for buyers who stay in their homes long-term.
| Feature | Conventional PMI | FHA MIP |
|---|---|---|
| Required when | Down payment < 20% | All FHA loans |
| Upfront cost | Sometimes | 1.75% of loan amount |
| Annual cost | 0.5% – 1.5% | 0.55% – 1.05% |
| Can be cancelled? | Yes — at 20% equity | Only if down payment ≥ 10% (after 11 years) |
How to Get Rid of PMI
Method 1: Wait for Automatic Cancellation
Under the federal Homeowners Protection Act, your lender must automatically cancel PMI when your loan balance reaches 78% of the original purchase price — as long as you are current on payments. This happens on a set schedule based on your amortization, regardless of whether your home has appreciated.
Method 2: Request Cancellation at 20% Equity
You do not have to wait for automatic cancellation. Once your loan balance drops to 80% of the original purchase price (20% equity), you can submit a written request to your servicer to cancel PMI. You must have a good payment history and may need to certify that there are no junior liens on the property.
Method 3: Get a New Appraisal
If your home has appreciated significantly since purchase, a new appraisal may show that your current loan balance is already below 80% of the home’s current value. Most lenders will consider cancelling PMI based on a new appraisal if you have owned the home for at least two years and have made substantial improvements.
Method 4: Refinance
If your home has appreciated and rates are favorable, refinancing into a new loan with at least 20% equity eliminates PMI entirely. This approach makes the most sense when you can also lower your interest rate at the same time, making the refinancing costs worthwhile.
“PMI is one of the most expensive fees homeowners pay — and one of the most overlooked. Tracking your equity and requesting cancellation the moment you hit 20% can save you thousands.” — Mortgage Servicer Representative
FAQ
Does PMI protect me as the borrower?
No. PMI protects the lender, not you. If you default on your mortgage and the home sells for less than the outstanding loan balance, PMI pays the lender for the shortfall. You receive no benefit from PMI — which is why eliminating it as quickly as possible is in your financial interest.
How do I know when I can cancel PMI?
Review your original mortgage documents or contact your loan servicer to find the date when your loan balance is scheduled to reach 80% of the original purchase price. You can also track this yourself using an amortization schedule. Once you reach 80% LTV, submit a written cancellation request to your servicer. They may require a good payment history and confirmation of no junior liens.
Can I avoid PMI without a 20% down payment?
Yes, there are a few strategies. Some lenders offer lender-paid PMI, where they cover the cost in exchange for a slightly higher interest rate. A piggyback loan (80/10/10) uses a second mortgage to cover 10% of the purchase price, allowing a 10% down payment without PMI. VA loans require no PMI regardless of down payment. Each option has trade-offs, so compare the total cost carefully.
Is FHA mortgage insurance the same as PMI?
No. FHA mortgage insurance premiums (MIP) and conventional PMI serve a similar purpose but work differently. FHA MIP includes an upfront premium of 1.75% of the loan amount plus an annual premium. Most importantly, FHA MIP lasts for the life of the loan if your down payment was less than 10%, while conventional PMI can be cancelled once you reach 20% equity.