Private Mortgage Insurance, or PMI, is a policy required by lenders on conventional loans when a borrower’s down payment is less than 20% of the home’s value. PMI protects the lender—not the homeowner—from losses if the borrower defaults, enabling buyers to secure financing with lower upfront cash.
Equity below 20% represents higher risk: if the borrower stops paying, selling the home may not cover the loan balance. Lenders use PMI premiums to offset that gap and safeguard their investment on loans with high loan-to-value (LTV) ratios.
The borrower pays PMI, either through monthly premiums, an upfront charge, or by accepting a slightly higher interest rate. Although it insures the lender, the cost burden stays with the homeowner.
PMI applies only to conventional mortgages. FHA, VA and USDA loans carry their own mortgage insurance or guarantee fees, so PMI is never required on those government-backed programs.
Lenders impose PMI whenever the LTV ratio exceeds 80%. For example, a $300,000 home with a $30,000 down payment (LTV = 90%) will require PMI until LTV drops to 80% or lower.
PMI is common on purchase mortgages with small down payments and on refinances that don’t meet the 20% equity benchmark. It may also apply when tapping home equity via a roll-in refinance rather than a traditional second lien.
Underwriters base PMI rates on the borrower’s LTV, credit score and loan term. Higher LTVs, lower scores and longer terms drive up premiums, reflecting greater default risk.
Annual PMI rates generally range from 0.3% to 1.5% of the original loan amount. On a $400,000 mortgage, that equates to roughly $1,200–$6,000 per year, or $100–$500 per month.
PMI can be paid in different ways:
Lender-paid PMI bundles the insurance premium into a slightly higher interest rate. This avoids a separate PMI charge but increases total interest over the life of the loan.
With single-premium PMI, you pay the entire insurance fee at closing. This option eliminates monthly PMI charges but raises your initial closing costs.
Most borrowers choose borrower-paid PMI, where the insurer bills the lender monthly and the premium is collected via an escrow account alongside property taxes and homeowners insurance.
By law, lenders must terminate PMI once the mortgage balance reaches 78% of the original home value, assuming payments stay current.
Borrowers can ask to cancel PMI at 80% LTV. Submit a written request to your servicer and demonstrate that your loan payments are up to date.
To verify current LTV, lenders often require a new appraisal or evidence of home improvements. Fees for appraisals can range from $300 to $500.
Making additional principal payments speeds up equity buildup and lets you reach the 80% LTV threshold sooner, cutting PMI costs.
In an 80-10-10 structure, you take a first mortgage at 80% LTV, a second lien at 10%, and a 10% down payment—eliminating PMI but adding a second-loan payment.
Lenders may offer credits that offset PMI or closing costs, while sellers can provide concessions to boost your down payment. Public and private assistance programs also help first-time buyers reach the 20% equity mark.
Eligible veterans, active-duty service members and low-income rural buyers can use VA or USDA loans. These government options require no PMI but carry their own funding or guarantee fees.
FHA loans charge Mortgage Insurance Premiums (MIP) regardless of down payment size, and MIP lasts for the life of the loan (unless making a 10%+ down payment). PMI ends once equity thresholds are met.
VA loans levy a one-time funding fee (1.4%–3.6% of loan amount based on service history and down payment), while USDA mortgages charge an upfront guarantee fee (1%) plus an annual fee (0.35%), paid monthly.
PMI can be canceled at 80% LTV, MIP generally cannot. VA/USDA fees are non-cancelable but often cost less over time than PMI on high-balance conventional loans.
Include PMI premiums, property taxes, insurance and mortgage interest to determine your full monthly housing expense.
Higher monthly PMI payments raise your front-end DTI (housing ratio) and back-end DTI (total debt ratio), potentially limiting how much you can borrow.
Plan for PMI in your budget by treating it as a temporary housing cost. Consider extra principal payments to eliminate PMI faster.
PMI premiums may be deductible as mortgage interest if your adjusted gross income (AGI) is below IRS thresholds and if you itemize deductions.
The deduction phases out for AGIs above $100,000 (single) or $200,000 (married filing jointly), with full phase-out at AGI of $109,000/$218,000.
Save Form 1098 from your lender and itemize on Schedule A of your federal tax return to claim PMI premiums as an interest deduction.
Yes. You can choose single-premium PMI added to your loan balance or a lender-paid PMI program with a higher rate instead of monthly premiums.
If an appraisal shows your home’s market value has risen enough to push LTV to 80%, you can request early cancellation of PMI.
Borrower-paid monthly PMI is not refundable, but any unearned single-premium portion may be prorated and returned if you refinance or pay off the loan.
PMI on an ARM functions like on a fixed mortgage: it continues until your principal balance or home value triggers the 80%–78% LTV thresholds despite rate adjustments.
PMI enables lower down payments but adds cost until you reach sufficient equity. Understanding rates, payment options and cancellation rules helps you manage or eliminate PMI quickly.
Boost your down payment, choose split-premium or lender-paid PMI, make extra principal payments and track home value increases to cancel PMI sooner.
Discuss your PMI options, alternative loan structures and tax implications with a mortgage advisor to tailor a strategy that fits your financial goals.
