What Is PMI and How to Get Rid of It: A Complete Guide

Private Mortgage Insurance (PMI) is a type of insurance that protects lenders when borrowers make down payments of less than 20% on conventional mortgages. While PMI doesn't directly benefit you as the borrower, it enables homeownership for those who haven't yet saved a full 20% down payment. Understanding how PMI works, how much it costs, and how to remove it can save you thousands of dollars over the life of your loan.

PMI exists because lenders take on additional risk when borrowers have less equity in their homes. If a borrower defaults and the lender must foreclose, a larger loan balance relative to the home's value increases the lender's potential loss. PMI provides a safety net for lenders, allowing them to offer conventional loans with lower down payments while protecting their financial interests.

When Does PMI Apply?

PMI is typically required on conventional mortgages when your down payment is less than 20% of the home's purchase price. This means your loan-to-value (LTV) ratio exceeds 80%. For example, if you buy a $400,000 home with a $60,000 down payment (15%), your LTV is 85%, so PMI would be required.

It's important to distinguish PMI from mortgage insurance on government-backed loans. FHA loans use Mortgage Insurance Premium (MIP), which has different rules and removal requirements. VA loans don't require PMI, but they may charge a funding fee. USDA loans also have their own guarantee fee structure. PMI specifically applies to conventional loans backed by Fannie Mae or Freddie Mac.

Some lenders offer lender-paid mortgage insurance (LPMI), where the lender pays the PMI premium upfront or over time in exchange for a higher interest rate. This can be beneficial if you plan to stay in the home long-term and want to avoid monthly PMI payments, but it's important to compare the total cost over your expected ownership period.

Understanding PMI Costs

PMI premiums are typically quoted as an annual percentage of your original loan amount, though they're paid monthly. Rates generally range from 0.3% to 1.5% annually, depending on several factors:

• Credit score: Higher credit scores typically qualify for lower PMI rates
• Down payment amount: Larger down payments result in lower PMI rates
• Loan-to-value ratio: Lower LTV ratios mean lower PMI costs
• Loan type: Some loan products have different PMI structures

For example, on a $360,000 loan with a 0.6% annual PMI rate, your annual PMI cost would be $2,160 ($360,000 × 0.006), which breaks down to $180 per month. This monthly payment continues until PMI is removed, which can add up to thousands of dollars over several years.

You can estimate your PMI costs using our mortgage calculator. Enter your loan amount, down payment percentage, and estimated PMI rate to see how PMI affects your total monthly payment and total loan cost.

How PMI Removal Works

Understanding when and how PMI can be removed is crucial for minimizing your total mortgage costs. There are three primary paths to PMI removal:

Automatic Termination

Federal law requires lenders to automatically cancel PMI when your principal balance reaches 78% of your home's original purchase price, assuming you're current on payments and haven't missed any payments in the prior 12 months. This happens automatically based on your loan's amortization schedule—you don't need to request it.

For a $400,000 home with a $360,000 loan, PMI would automatically terminate when your principal balance reaches $312,000 ($400,000 × 0.78). On a 30-year loan at 6.5%, this typically occurs around year 11 or 12, depending on your interest rate and payment schedule.

Borrower-Requested Cancellation

You can request PMI removal when your loan balance reaches 80% of your home's original purchase price, which typically happens around year 9 or 10 on a 30-year loan. However, lenders often require:

• A good payment history (typically no late payments in the prior 12-24 months)
• Proof that home improvements haven't decreased the value
• An appraisal showing the property hasn't declined in value
• Sometimes, a new appraisal to document current value

If you've made significant improvements to your home or if property values have increased, you may be able to use the current appraised value instead of the original purchase price when calculating your LTV ratio. This can help you reach the 80% threshold sooner.

Refinancing

If you've built sufficient equity through payments or property appreciation, refinancing into a new loan without PMI is another option. This makes sense if current interest rates are favorable and you can secure a new loan at 80% LTV or less. However, refinancing involves closing costs, so it's important to calculate whether the savings from removing PMI outweigh the refinancing costs.

Strategies to Remove PMI Faster

Several strategies can help you reach the PMI removal threshold sooner:

Make Extra Principal Payments: Every extra dollar you pay toward principal reduces your loan balance faster, moving you closer to the 80% or 78% LTV threshold. Even small extra payments—$50 or $100 per month—can shorten the time until PMI removal by months or years.

Target Home Improvements: If you're close to the 80% LTV threshold, strategic home improvements that increase your property value can help you reach the threshold sooner. However, you'll need an appraisal to document the increased value, and improvements must genuinely add value—cosmetic updates rarely move the needle significantly.

Monitor Market Appreciation: If property values in your area have increased significantly since you purchased, you may be able to use the current appraised value when requesting PMI removal. This can be particularly effective if you're in a rapidly appreciating market, though you'll need to pay for an appraisal to document the new value.

Biweekly Payments: Switching to biweekly payments effectively adds one extra payment per year, accelerating principal reduction. However, confirm your lender properly applies these payments to principal and doesn't charge fees for this payment structure.

Real-World Example: The Cost of PMI

Sarah purchases a $400,000 home with a $60,000 down payment (15%), financing $340,000 at 6.5% for 30 years. Her PMI rate is 0.7% annually, costing $2,380 per year ($198 per month).

If Sarah makes only her regular payments, PMI automatically terminates around year 11 when her balance reaches $312,000. Over those 11 years, she'll pay approximately $26,180 in PMI premiums.

If Sarah pays an extra $100 per month toward principal from the start, she reaches the 80% threshold around year 8, saving about $6,000 in PMI costs. If she pays an extra $200 per month, she reaches 80% around year 6, saving approximately $10,000 in PMI premiums.

This example illustrates why making extra principal payments can be one of the most effective ways to reduce PMI costs, especially early in the loan term when principal balances are highest.

Frequently Asked Questions

Is PMI tax-deductible?

PMI tax deductibility has varied by tax year and income level. Under the Tax Cuts and Jobs Act, PMI deduction rules changed. Consult current IRS guidance or a tax professional to understand the current rules for your situation.

Does PMI protect me?

No. PMI protects the lender, not the borrower. If you default on your mortgage, PMI covers the lender's losses, but you still lose your home and potentially face deficiency judgments. However, PMI enables homeownership for those who haven't saved 20% down, potentially allowing you to purchase a home sooner and benefit from appreciation.

Can I pay PMI upfront?

Some lenders offer single-premium PMI or lender-paid MI, where you pay the premium upfront or it's rolled into your interest rate. Compare the total cost over your expected ownership period—upfront PMI can make sense if you plan to stay in the home long-term, but it's less flexible if you sell or refinance early.

What's the difference between PMI and MIP?

PMI applies to conventional loans and can be removed when you reach 80% LTV. MIP (Mortgage Insurance Premium) applies to FHA loans and has different removal rules—often requiring refinancing or paying for the life of the loan, depending on your down payment and loan origination date.

Will PMI automatically drop off?

PMI automatically terminates at 78% LTV based on your amortization schedule, but you can request removal earlier at 80% LTV if you meet your lender's requirements. Monitor your loan balance and request removal as soon as you're eligible to save money.

Related Guides

• Mortgage Down Payment: How Much Do You Really Need?
• Understanding Closing Costs and How to Save
• How Extra Payments Cut Years Off Your Mortgage
• Fixed vs Adjustable-Rate Mortgages: Which Is Right for You?

Sources

• Consumer Financial Protection Bureau. "Private Mortgage Insurance (PMI)."
• Fannie Mae. "Selling Guide: Mortgage Insurance Requirements."
• Freddie Mac. "Mortgage Insurance Guidelines and Best Practices."