PMI Guide: Private Mortgage Insurance Explained

By the SimpleCalc Mortgage Editorial Team · Updated July 2026 · 5 min read · Insurance

PMI is one of those mortgage costs that catches buyers off guard — not because it's hidden exactly, but because it feels backwards. You're paying for insurance that protects your lender, not you. If you stop making payments, PMI reimburses the lender. You never see a dime of it. But it's the price of entry when you put less than 20% down on a conventional loan, and understanding how it works and when it ends is essential to managing your total housing cost over time.

Why PMI Exists and Who It Actually Protects

When a borrower puts less than 20% down, the lender is exposed to greater default risk — if the borrower stops paying and the home goes into foreclosure, the lender needs to be confident they can recover the full loan balance. With a large down payment, the math works. With a 5% down payment on a home that declines slightly in value, there's a real chance the lender doesn't make whole on foreclosure. PMI fills that gap.

The lender requires it. The insurance company issues the policy to the lender. You write the checks for the premium. That's the arrangement — and it's non-negotiable on conventional loans with LTVs above 80%.

What PMI Actually Costs

PMI typically runs between 0.5% and 1.5% of your loan amount per year, billed monthly. Where you land in that range depends on your credit score, your loan-to-value ratio, your loan type, and the specific PMI insurer your lender uses. Higher credit scores and larger down payments push you toward the lower end of that range.

PMI vs. FHA MIP: Two Different Systems

PMI applies to conventional loans. FHA loans have their own version called MIP (Mortgage Insurance Premium). They serve the same purpose but differ in two critical ways: cost and duration.

• Conventional PMI — removable once you hit 20% equity. It has a clear, reachable endpoint. Your monthly cost can drop to zero when your loan balance falls far enough relative to your home's value.
• FHA MIP — if you put less than 10% down, it stays for the entire life of the loan. Thirty years of payments, even after your equity grows well past 20%. This is a significant long-term cost that gets insufficient attention when buyers compare FHA vs. conventional loans.

The Loan-to-Value Threshold That Triggers PMI

PMI kicks in on conventional loans whenever your loan-to-value ratio — your outstanding loan balance divided by the home's appraised value — exceeds 80%. It's that straightforward:

• $300,000 home, 10% down ($30,000 down) → loan of $270,000 → LTV 90% → PMI required
• $300,000 home, 20% down ($60,000 down) → loan of $240,000 → LTV 80% → no PMI

Every percentage point of additional down payment above 10% reduces your LTV and typically reduces your PMI rate as well — both a lower loan amount and a better LTV tier work together to shrink the monthly cost.

How to Cancel PMI — The Legal Requirements

Under the Homeowners Protection Act of 1998, lenders must follow specific cancellation rules for conventional PMI. These are not optional — they're federal law:

1. You can request cancellation at 80% LTV. When your loan balance reaches 80% of the home's original appraised value, you can formally request PMI cancellation. The lender may require a new appraisal to confirm current value. Your account must be current and in good standing.
2. Lenders must cancel automatically at 78% LTV. When your balance reaches 78% of the original value — based on your scheduled payments — the lender must cancel PMI automatically without you having to ask. Again, payments must be current.
3. Final termination at the loan midpoint. Even if your LTV never drops below 78% (perhaps because the home lost value), PMI must be terminated when you reach the midpoint of your loan — year 15 on a 30-year mortgage.

Four Ways to Avoid PMI Entirely

• Put 20% down. The cleanest path. Requires more upfront but eliminates the monthly drag permanently from day one.
• Piggyback loan (80/10/10). A first mortgage for 80%, a second mortgage (usually a HELOC or home equity loan) for 10%, and 10% down from you. No PMI, but the second loan typically carries a higher rate and shorter term. Run the math to see if the second loan's cost exceeds what PMI would have cost.
• Lender-paid PMI (LPMI). The lender covers the PMI premium, but in exchange raises your interest rate — permanently. You can't cancel LPMI the way you cancel borrower-paid PMI, because it's baked into the rate for the life of the loan. This can make sense for buyers who plan to keep the loan a short time, but over 30 years it often costs more than standard PMI would have.
• VA loan. No PMI, ever, regardless of down payment. If you're an eligible veteran, this is one of the VA loan's strongest advantages.

Should You Wait Until You Can Put 20% Down?

This is the real question. The honest answer: it depends on your market. If home prices in your area are rising $15,000–$25,000 per year, waiting 3–4 years to save an extra $30,000 in down payment may cost you far more in appreciation than the PMI you were trying to avoid. On the other hand, if prices are flat or falling, the calculation shifts. PMI of $150/month over five years costs $9,000 — significant, but not necessarily more costly than missing the right buying window in an appreciating market.