What Is PMI? Private Mortgage Insurance, Explained

Quick answer

In one sentence

PMI is private mortgage insurance a lender usually requires on a conventional loan when your down payment is under 20%. It protects the lender if you default, you pay for it, and you can generally cancel it once you owe 80% of the home's original value.

Private mortgage insurance, or PMI, is one of the most misunderstood lines on a mortgage quote. The name sounds like it protects the borrower, but it does the opposite: PMI protects the lender if you stop paying. You pay the premium, and you get none of the coverage. Understanding that single fact changes how you think about it — PMI is not a benefit you are buying, it is a cost of borrowing with a small down payment.

According to the Consumer Financial Protection Bureau, PMI is "a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price." It applies to conventional loans specifically, and it can also appear when you refinance a conventional loan and your equity is below 20 percent. The good news is that PMI is temporary by law — unlike the mortgage insurance on many government loans, conventional PMI has clear cancellation rules you can plan around.

Why lenders require PMI

When you put 20 percent down, you have real skin in the game and a cushion of equity that protects the lender if they ever have to foreclose and sell the home at a loss. With less than 20 percent down, that cushion is thinner, so the loan is riskier for the lender. PMI is how the lender transfers part of that risk to an insurance company — and charges you for the premium.

This is why the magic number is 20 percent. It is not an arbitrary threshold; it is the point at which the lender decides the equity cushion is large enough to go without insurance. The size of your down payment, and therefore your starting loan-to-value (LTV) ratio, is the single input that determines whether you pay PMI at all.

How much PMI costs and how it is paid

PMI is usually quoted as an annual percentage of the loan balance, commonly in a range from roughly 0.3% to 1.5% per year, with the exact rate driven by your credit score, down payment, and loan type. On a $300,000 loan, a 0.6% annual PMI rate is about $1,800 a year, or roughly $150 added to your monthly payment. Borrowers with lower credit scores and smaller down payments sit at the higher end of the range.

The most common arrangement is borrower-paid monthly PMI, bundled into your mortgage payment alongside principal, interest, taxes, and insurance. You may also be offered single-premium PMI (paid upfront at closing) or lender-paid PMI (the lender covers the premium in exchange for a higher interest rate). Lender-paid PMI can look attractive because it removes the separate line item, but the higher rate often lasts for the entire life of the loan and cannot be cancelled the way monthly PMI can.

• Borrower-paid monthly: added to your payment; cancellable under the rules below.
• Single-premium: one upfront charge at closing; may be partially refundable, may not.
• Lender-paid: baked into a higher interest rate for the life of the loan; not separately cancellable.

Because the monthly, cancellable version is the one you can actually get rid of, it is usually the most flexible choice for a buyer who expects their equity to grow.

How to get rid of PMI: the 80% and 78% rules

This is where the rules work in your favor. The CFPB describes two distinct rights for a single-family primary residence whose loan closed on or after July 29, 1999. First, you can request cancellation: "You have the right to ask your servicer to cancel PMI on the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home." To cancel on request, you generally need to make the request in writing, have a good payment history and be current, certify there are no junior liens, and sometimes provide an appraisal showing the value has not fallen.

Second, cancellation can happen automatically. The CFPB states that "your servicer must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home," as long as you are current on payments. You do not have to ask for this one — it is the lender's obligation. There is also a backstop midpoint rule: your servicer must end PMI the month after you reach the midpoint of your loan's amortization schedule (for a 30-year loan, after 15 years), even if the balance has not yet hit 78 percent.

Two levers speed this up. Paying extra principal brings your balance down to the 80 percent threshold sooner, and if your home's value has risen you may be able to request cancellation based on a new appraisal. FHA and VA loans follow different rules, so these conventional-loan thresholds do not apply to government-backed mortgages.

Is avoiding PMI always worth it?

The instinct is to avoid PMI at all costs by putting down a full 20 percent. Sometimes that is right. But PMI is not automatically a bad deal — it lets you buy sooner, and buying sooner can mean building equity and locking in a price instead of waiting years to save a larger down payment while home values and rents climb.

The honest comparison is between two paths over the same time horizon: buying now with PMI you will cancel in a few years, versus continuing to rent while you save to 20 percent. Model both. If PMI costs you $150 a month for three years before you cancel it — about $5,400 total — that is the price of entering the market three years earlier, and it needs to be weighed against three years of rent and price changes, not treated as pure waste.

Key terms in plain English

Private mortgage insurance (PMI)

Insurance a lender requires on a conventional loan with less than 20% down. The borrower pays; it protects the lender against loss if the borrower defaults.

Loan-to-value ratio (LTV)

The loan balance divided by the home's value, expressed as a percent. An 80% LTV means you owe 80% of the value and hold 20% in equity.

Mortgage insurance premium (MIP)

The equivalent charge on FHA loans. Unlike conventional PMI, FHA MIP often lasts the life of the loan and follows different cancellation rules.

Automatic termination

The lender's legal duty to drop PMI when your balance is scheduled to reach 78% of the home's original value, provided you are current on payments.

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