Mortgage PMI Guide: Cost, Removal Rules, and When You Pay

What private mortgage insurance is

Private mortgage insurance (PMI) is an insurance policy paid by the borrower that protects the lender against loss if the borrower defaults. It is required on most conventional loans with less than 20% down. PMI does not protect you, the borrower — that's worth saying twice, because the wording on closing documents can confuse first-time buyers.

PMI exists because lenders consider loans above 80% loan-to-value (LTV) higher risk. The insurance lets them write those higher-LTV loans at competitive rates without taking on the full default risk themselves. The cost is passed to you in the monthly payment.

How PMI is priced

PMI rates depend on three things: credit score, LTV, and loan term. For a typical conventional loan with 5% down (95% LTV) and a 720 credit score, PMI runs around 0.50%–0.70% of the loan amount per year. With a 660 score at the same LTV, PMI can climb to 1.0%–1.5%. With 15% down (85% LTV) the rate drops sharply.

On a $400,000 loan at 0.6% PMI, that's $200/month — added to your principal, interest, taxes, and insurance. It's enough to push some buyers from comfortable to stretched, which is why getting to 80% LTV (and dropping PMI) is a real wealth-building event.

Borrower-paid vs. lender-paid PMI

Most PMI is borrower-paid monthly (BPMI) — the dollar amount shows on your monthly statement and disappears once you cancel it. A less common alternative is lender-paid PMI (LPMI), where the lender bakes the insurance cost into a slightly higher interest rate (typically 0.25%–0.50% higher).

LPMI looks attractive because there's no separate line item and the higher rate is tax-deductible (whereas BPMI deductibility comes and goes with tax law). The catch: LPMI never cancels. You're stuck with the higher rate until you refinance. For most borrowers who plan to reach 80% LTV within five years, BPMI is the better deal.

How PMI gets cancelled

The federal Homeowners Protection Act (HPA) governs PMI cancellation on conventional loans. There are three paths to removal:

• Automatic termination at 78% LTV on the original schedule (the servicer must drop it without any action from you).
• Borrower-requested cancellation at 80% LTV on the original schedule (you submit a written request).
• Appraisal-based cancellation if your home has appreciated — you order an appraisal at your cost (typically $400–$600), and if the new value shows 80% LTV or better, the servicer must cancel.

The third path is the one most homeowners don't know about. In appreciating markets, you can often eliminate PMI well before the scheduled date — sometimes within two years of closing. The appraisal cost pays back in 2–4 months of saved premium.

PMI cancellation requirements

You must be current on payments, have no second mortgage that would push you above 80% combined LTV, and have a good payment history. Lenders sometimes require a 'seasoning' period of at least 2 years before considering an appraisal-based cancellation.

Don't conflate PMI with FHA's MIP. Even at 78% LTV, FHA MIP on most modern loans does not cancel automatically — you have to refinance into a conventional loan to escape it. See our FHA guide for the cancellation differences.

The 'piggyback' alternative

Before the financial crisis, the standard alternative to PMI was an 80/10/10 piggyback — first mortgage at 80% LTV, a second mortgage (HELOC or fixed second) at 10%, and a 10% cash down payment. The second mortgage carries a higher rate but no PMI.

Piggybacks vanished after 2008 and have made a partial comeback. They make sense when PMI pricing is unusually high for your credit profile or when you expect to pay off the second mortgage quickly. Run both scenarios through the payment calculator to compare.

PMI tax deductibility

PMI deductibility has been on-again, off-again since 2007. Currently it is deductible for taxpayers under certain income thresholds. Because the rules change, treat PMI deduction as a bonus, not a planning assumption, and verify the current year with a tax professional.