If you buy a home with less than a 20 percent down payment on a conventional loan, you will almost certainly meet private mortgage insurance, usually shortened to PMI. It is a recurring cost that protects the lender, not you, and it can quietly add hundreds of dollars to your monthly payment. The good news is that PMI is temporary, and understanding the rules around it can save you real money by getting it removed as early as the law allows.
This guide explains what PMI is, why it exists, how its cost is figured, the different ways you pay it, and the specific paths to canceling it.
What PMI actually is
Private mortgage insurance is an insurance policy that covers the lender if you default on the loan. When you put down less than 20 percent, the lender is taking on more risk because you have less of your own money in the property. PMI offsets that risk for the lender by paying out a portion of the loan balance if the borrower stops paying and the home is foreclosed.
The crucial point that confuses many borrowers: you pay the premiums, but the protection is entirely for the lender. PMI does not cover you, it does not pay your mortgage if you lose your job, and it builds no value for you. It is simply the price of borrowing with a smaller down payment.
PMI applies to conventional loans. Government-backed loans have their own separate insurance structures with different rules, so the cancellation paths described here are specific to conventional mortgages.
Why lenders require it
The 20 percent down payment is the dividing line because, historically, a 20 percent equity cushion gives the lender enough margin to recover the loan amount through a sale even if home values dip and foreclosure costs eat into the proceeds. Below that cushion, the lender’s risk rises, so it requires insurance to bring that risk back down.
This is also why PMI gives you a choice rather than a wall. You are not blocked from buying with less than 20 percent down. You simply pay PMI until you reach enough equity, at which point the cushion exists and the insurance is no longer needed. You can test how different down payments change your loan size and whether PMI applies using a down payment affordability calculator.
How the cost is calculated
PMI is typically expressed as an annual percentage of the loan balance, then divided into monthly amounts. The percentage usually falls somewhere in a range that depends on a few factors:
- Your down payment size. A smaller down payment, such as 5 percent, generally means a higher PMI rate than a larger one, such as 15 percent, because the lender’s risk is greater.
- Your credit profile. Stronger credit usually earns a lower PMI rate, because statistically those borrowers are less likely to default.
- The loan type and term. Different loan structures can carry different PMI pricing.
A worked example
Suppose you buy a home for $350,000 with a 10 percent down payment, so you borrow $315,000. If your PMI rate is 0.5 percent annually:
- Annual PMI = $315,000 times 0.005 = $1,575
- Monthly PMI = $1,575 divided by 12, which is about $131
That $131 is added to your monthly housing payment on top of principal, interest, taxes, and homeowners insurance. Over a few years, before you can cancel it, PMI on a loan this size can add up to several thousand dollars. A PMI calculator lets you estimate your own monthly premium based on your loan amount and rate.
The ways you can pay PMI
PMI is not always a separate monthly line. There are a few common structures, and the choice affects both your monthly payment and your ability to cancel.
- Borrower-paid monthly PMI. The standard arrangement. A premium is added to your monthly payment and stops once you cancel. This is the most flexible because cancellation rules apply directly.
- Single-premium PMI. You pay the entire PMI cost up front as a lump sum at closing, sometimes rolled into the loan. There is no monthly premium, but if you sell or refinance early, you generally do not get a refund of the unused portion.
- Lender-paid PMI. The lender covers the PMI in exchange for a higher interest rate. There is no separate PMI line, but the higher rate lasts for the life of the loan and does not automatically drop off when you reach 20 percent equity. This can end up costing more over time precisely because it never cancels on its own.
Borrower-paid monthly PMI is the most common and the easiest to eliminate, so the cancellation rules below focus on it.
How to get rid of PMI
This is the part worth memorizing, because removing PMI is one of the clearest ways to lower a housing payment without changing your loan. There are several distinct paths.
Request cancellation at 20 percent equity
Once your loan balance falls to 80 percent of the home’s original value, you can request that PMI be canceled. This is borrower-initiated, meaning you have to ask, the servicer will not always do it for you. The request typically must be in writing, your payment history needs to be in good standing, and the servicer may require confirmation that the value has not dropped.
You reach this point through normal amortization plus any extra principal payments you have made. Because paying down principal early accelerates this milestone, extra payments early in the loan can be doubly valuable: they reduce interest and they pull forward the date you can drop PMI. A PMI removal calculator can estimate when your balance will hit the cancellation threshold based on your payment schedule.
Automatic termination at 22 percent equity
If you do not request cancellation, the servicer is generally required to automatically terminate borrower-paid PMI once your balance reaches 78 percent of the original value, provided your payments are current. This automatic point is based on the original amortization schedule, so it can arrive later than the date you could have requested cancellation yourself. This is why being proactive at the 80 percent mark saves money.
Reach the midpoint of the loan
There is also a backstop rule: even if your balance has not fallen far enough, PMI generally must be removed at the halfway point of the loan’s term if you are current on payments. For a 30-year loan, that is after 15 years. This rule mostly matters for borrowers whose values have not risen and who have not made extra payments.
Use a new appraisal after value gains
If your home’s value has risen, either through market appreciation or improvements you made, you may be able to cancel PMI sooner by ordering a new appraisal. If the new value puts your loan-to-value ratio at or below the lender’s threshold, the equity exists even though your balance alone would not have gotten you there yet. Servicers have specific seasoning requirements and procedures for value-based cancellation, so confirm the rules before paying for an appraisal.
Refinance out of PMI
If you have built substantial equity, refinancing into a new loan with a balance at or below 80 percent of the current value eliminates PMI on the new loan entirely. This only makes sense if the overall economics of the new loan, including its rate and closing costs, work in your favor. The PMI savings alone rarely justify a refinance, but combined with a better rate it can.
Frequently asked questions
Does PMI protect me if I cannot make my payments?
No. PMI protects the lender, not the borrower. If you default, PMI may reimburse the lender for part of its loss, but it does nothing to help you keep the home or cover your missed payments. You pay the premium, but the coverage is entirely for the lender’s benefit.
How soon can I cancel PMI?
You can usually request cancellation once your balance reaches 80 percent of the home’s original value. If you do not request it, automatic termination generally kicks in at 78 percent, provided your payments are current. Making extra principal payments early can move the 80 percent request date significantly forward.
Can making extra mortgage payments remove PMI faster?
Yes. Extra principal payments reduce your balance faster, which means you reach the 80 percent loan-to-value threshold sooner and can request cancellation earlier. This is one of the higher-return reasons to prepay, because dropping PMI cuts a recurring monthly cost on top of saving interest.
Is lender-paid PMI a good deal because there is no monthly premium?
Not necessarily. Lender-paid PMI trades the monthly premium for a higher interest rate that lasts the entire life of the loan and does not automatically drop off when you reach 20 percent equity. Over many years, that permanent rate increase can cost more than borrower-paid PMI that you cancel after a few years. Compare the total cost before assuming the absence of a monthly line is cheaper.