Imagine paying for your neighbour's car insurance — not because it helps you in any way, but because the bank financing your car said you had to until your loan balance drops below a certain threshold. You'd find that bizarre. And yet this is almost exactly what Private Mortgage Insurance is. You buy the policy. You pay the premiums. Your lender collects if you default. You receive nothing from the coverage personally.
PMI is one of those financial products that most first-time homebuyers encounter without fully understanding — they see the line item on their closing disclosure, pay it for years, and never think too hard about what it actually is or how to make it go away. This article fixes that.
0.5–1.5%
Annual PMI cost of loan
$200–$500
Typical monthly PMI cost
20%
Equity needed to cancel PMI
What Is PMI and Why Does It Exist?
Private Mortgage Insurance (PMI) is an insurance policy required on conventional home loans when the borrower puts down less than 20% of the purchase price. The policy is taken out to protect the mortgage lender — not the borrower — against financial loss if the borrower stops making payments and the lender must foreclose.
The logic from the lender's perspective makes sense: a borrower with less than 20% equity has less financial stake in the property. If things go wrong, they're more likely to walk away. PMI offsets that risk — but instead of the bank paying for its own risk protection, it passes the cost entirely to the borrower. You pay to manage someone else's risk, with zero upside for yourself.
The technical trigger is the loan-to-value (LTV) ratio. If your loan balance is more than 80% of the home's value, PMI applies. Put down 10% on a $400,000 home — your loan is $360,000, which is 90% LTV — PMI required. Put down $80,000 (20%) — your loan is $320,000, which is exactly 80% LTV — no PMI.
What PMI Actually Costs You Over Time
The monthly cost feels small in isolation. Stacked over years, it's significant real money that evaporates entirely — no equity, no asset, nothing to show for it.
Here's what PMI costs cumulatively on a $350,000 loan at a 0.9% annual PMI rate ($262/month):
A homebuyer who forgets to request PMI cancellation and keeps paying for 15 years will hand over $47,160 with nothing to show for it. This isn't hypothetical — it happens regularly because PMI doesn't cancel automatically until 22% equity, and many borrowers never request the earlier cancellation at 20%.
PMI Rates by Credit Score and Down Payment
| Credit Score | 5% Down | 10% Down | 15% Down |
|---|---|---|---|
| 760+ (Excellent) | 0.17–0.32% | 0.12–0.23% | 0.06–0.12% |
| 720–759 (Very Good) | 0.32–0.52% | 0.24–0.39% | 0.16–0.28% |
| 680–719 (Good) | 0.52–0.76% | 0.39–0.56% | 0.28–0.44% |
| 640–679 (Fair) | 0.76–1.20% | 0.56–0.92% | 0.44–0.72% |
| Below 640 | 1.20–1.50%+ | 0.92–1.20%+ | 0.72–1.00%+ |
Two lessons from this table: first, credit score has a massive impact on your PMI rate — improving from 680 to 760 can more than halve your PMI cost. Second, every 5% more you put down cuts the rate meaningfully. If you're sitting at 15% saved and debating whether to wait for 20%, the PMI cost comparison is often the decisive calculation.
5 Ways to Avoid or Eliminate PMI
01
Put down 20% or more
The cleanest solution. If your down payment reaches 20%, your LTV starts at 80% and PMI never triggers. If you're close to 20% — say at 17% — it's worth calculating whether a short delay to save the remaining 3% saves more than a year or two of PMI payments. On a $400,000 home, getting from 17% to 20% requires an extra $12,000 but saves roughly $2,400–$3,600 per year in PMI. Break-even: 3–5 years.
02
Use a piggyback loan (80-10-10 structure)
Take a primary mortgage for 80% of the home price, a second mortgage (home equity loan or HELOC) for 10%, and put 10% down yourself. Your primary mortgage stays at exactly 80% LTV — no PMI triggered. The second loan carries a higher interest rate than your primary, but is often still cheaper than years of PMI. This structure requires qualification for two simultaneous loans and works best for borrowers with strong credit and income.
03
Choose lender-paid PMI (LPMI)
Some lenders offer to absorb the PMI premium themselves in exchange for a slightly higher interest rate on your mortgage — typically 0.25–0.5% higher. No separate PMI line item appears on your statement. The tradeoff: the higher rate is permanent for the life of the loan, whereas standard PMI eventually cancels. LPMI works best if you plan to sell or refinance within 5–7 years before the permanent rate premium costs more than the PMI you avoided.
04
Use a VA loan (military buyers only)
Veterans, active military, and qualifying surviving spouses can access VA loans — which carry no PMI requirement at any down payment level, including 0% down. This is one of the most financially valuable benefits of military service. VA loans also typically come with competitive interest rates and no down payment requirement. If you qualify for a VA loan and aren't using it, you're leaving a substantial financial benefit unclaimed.
05
Request cancellation once you reach 20% equity
Under the Homeowners Protection Act, lenders must automatically cancel PMI when your LTV reaches 78% based on the original purchase price and payment schedule. But you can request cancellation at 80% LTV (20% equity) — and most lenders will agree, sometimes requiring a new appraisal to confirm the home's value. If your home has appreciated since purchase, your LTV may already be below 80% based on current value even if it isn't based on original price. This is worth checking annually.
PMI doesn't cancel automatically when you hit 20% equity — you have to ask. Automatic cancellation only triggers at 22% equity based on original purchase price and the original amortisation schedule. Many homeowners overpay PMI for months or years past the point where they could have cancelled it. Check your current balance and home value now. If you're at or near 20% equity, call your servicer and request cancellation.
PMI vs FHA Mortgage Insurance: Not the Same Thing
If you're comparing conventional loans (which carry PMI) with FHA loans, it's important to understand that FHA has its own mortgage insurance called MIP (Mortgage Insurance Premium) — and it works very differently, often more expensively.
FHA MIP includes two components: an upfront premium of 1.75% of the loan amount (typically financed into the loan) and an annual premium of 0.55–1.05% depending on loan term, LTV, and loan size. The critical difference: FHA MIP often cannot be cancelled. If you put down less than 10%, MIP stays for the life of the loan. The only exit is refinancing into a conventional loan once you have 20% equity.
This is why buyers who take FHA loans with minimal down payments often plan to refinance within a few years — not just for the rate, but specifically to escape MIP and replace it with either no PMI (if they've reached 20% equity) or conventional PMI that can eventually be cancelled.
Calculate your mortgage payment with and without PMI
Model different down payment scenarios in our free mortgage calculator to see exactly how PMI affects your monthly payment — and how fast you build equity toward the 20% cancellation threshold.
Open Mortgage Calculator arrow_forwardThe Home Appreciation Shortcut
There's a PMI exit strategy that many homeowners overlook entirely: if your home's value rises after purchase, your LTV may drop below 80% even without making extra principal payments — simply because the denominator (home value) has grown.
Example: you bought a $350,000 home with 10% down, leaving a $315,000 loan at 90% LTV. Three years later, your home is worth $420,000 and your balance has fallen to $296,000. Your current LTV is 296,000 ÷ 420,000 = 70.5%. You're well below 80% — and you can request PMI cancellation based on current value, typically requiring a new appraisal ($300–$600). That appraisal cost pays for itself in one or two months of PMI savings.
In markets where property values have risen significantly, this shortcut can eliminate PMI years ahead of the original amortisation schedule. Check your home's current estimated value annually — sites like Zillow or Redfin give rough estimates, but a formal appraisal is required by most lenders for official cancellation based on appreciated value.