Private Mortgage Insurance (PMI) Explained, and How to Get Rid of It

For many aspiring homeowners, saving a full 20% down payment can take years, especially as home prices rise. Private mortgage insurance, or PMI, is one of the main reasons people can buy a home with a much smaller down payment. It opens the door to homeownership sooner, but it also adds to your monthly costs. The good news is that PMI on conventional loans doesn't last forever, and understanding how to remove it can save you a meaningful amount of money.

What PMI is

Private mortgage insurance protects the lender, not you, if you stop making payments on your loan. When a borrower puts down less than 20%, the lender takes on more risk, because there's less equity in the home to protect them if the borrower defaults. PMI shifts some of that risk to an insurance company.

PMI is usually required on conventional loans when your down payment is less than 20% of the home's purchase price. Even though you pay for it, it doesn't protect you if you fall behind on payments. Its purpose is simply to make lenders more willing to approve loans with smaller down payments.

How much PMI costs

The cost of PMI depends on several factors, including the size of your down payment, your credit score and the type of loan. Generally, a larger down payment and a higher credit score lead to lower PMI costs. PMI is most often added to your monthly mortgage payment, though some lenders offer other arrangements, such as paying it upfront in a lump sum or accepting a higher interest rate in exchange for no separate PMI payment.

Your Loan Estimate will show your estimated PMI cost, so you can see exactly how much it adds to your payment and compare options across lenders.

How to remove PMI

The federal Homeowners Protection Act gives most homeowners with conventional loans on their primary residence two important ways to stop paying PMI.

The first is requesting cancellation. You can generally ask your lender to cancel PMI once your loan balance reaches 80% of the home's original value. Original value usually means the lower of the purchase price or the appraised value at the time you bought the home. To qualify, lenders may require that you have a good payment history, that you're current on your payments and that you can show the home's value hasn't declined, which may involve an appraisal.

The second is automatic termination. Even if you don't request it, PMI generally ends automatically when your loan balance is scheduled to reach 78% of the home's original value, based on your original payment schedule, as long as you're current on your payments.

Your lender is required to tell you about these rights. Your closing documents should include the dates when you can request cancellation and when PMI will end automatically. If you can't find them, ask your loan servicer.

Ways to reach 80% sooner

If you'd like to stop paying PMI earlier, there are several strategies to consider. Making extra payments toward your principal reduces your loan balance faster, helping you reach the 80% threshold sooner. Even modest extra payments each month can make a difference.

If your home's value has risen significantly since you bought it, some lenders may allow you to use the current value rather than the original value to calculate your equity. This usually requires a new appraisal and may come with other conditions, such as having owned the home for a certain amount of time. Lender rules vary, so ask your servicer what's possible.

Refinancing is another option. If you've built enough equity, refinancing into a new loan where you owe less than 80% of the home's current value can eliminate PMI. Refinancing comes with closing costs, though, so it makes the most sense when it also lowers your interest rate or meets other financial goals.

FHA mortgage insurance is different

FHA loans don't use PMI. Instead, they charge mortgage insurance premiums, or MIP, which work differently. FHA loans include an upfront premium and an annual premium paid monthly. Depending on your down payment and when the loan was made, the annual premium may last for 11 years or for the entire life of the loan.

Because FHA mortgage insurance can be harder to remove, some FHA borrowers refinance into a conventional loan once they have enough equity, which allows them to drop mortgage insurance entirely if they owe less than 80% of the home's value.

Is paying PMI worth it?

PMI is an added cost, but it isn't necessarily a bad deal. If waiting to save a full 20% down payment would mean years of rent payments and the risk of home prices rising further, paying PMI for a few years may make more financial sense. PMI can be the price of getting into a home sooner and starting to build equity.

The key is to understand what you're paying, compare your options and have a plan to remove PMI as soon as you're eligible. Treat it as a temporary cost, not a permanent part of your mortgage.