What Is PMI? How Private Mortgage Insurance Works and How to Avoid It

Private Mortgage Insurance (PMI) is one of the most misunderstood homebuying costs. It's not insurance that protects you — it protects your lender if you default. Yet you pay for it. Here's everything you need to know to minimise or eliminate it.

What Exactly Is PMI?

When you put down less than 20% of the home's purchase price, your loan-to-value ratio (LTV) exceeds 80%. At that level, lenders consider the loan riskier. They require you to purchase PMI, which compensates them if you stop making payments and the home sells for less than you owe.

PMI is typically paid monthly as part of your mortgage payment, though some lenders offer upfront or split-premium options.

How Much Does PMI Cost?

PMI typically costs 0.5%–1.5% of the original loan amount per year, depending on your credit score, LTV, and loan type.

When Does PMI Go Away?

Under the Homeowners Protection Act (HPA), lenders must automatically cancel PMI when:

• •Your LTV reaches 78% of the original purchase price (mandatory automatic cancellation)
• •You reach the midpoint of your loan term (e.g., year 15 on a 30-year loan)

You can also request cancellation when your LTV drops to 80% through:

• •Regular payments paying down the principal
• •Extra payments you have made voluntarily
• •A new appraisal showing the home has increased in value

5 Ways to Avoid or Eliminate PMI

1. Put 20% Down

The most direct route. On a $400,000 home that means $80,000 down. If you can't save that amount, consider buying a less expensive home or waiting until you have the funds. PMI on a $320,000 loan at 0.8% costs over $25,000 over the years it applies.

2. Piggyback Loan (80-10-10)

Take an 80% first mortgage, a 10% second mortgage (home equity loan or HELOC), and put 10% down. Your first mortgage never exceeds 80% LTV, so no PMI. The second mortgage carries a higher rate, but you can pay it off quickly.

3. Lender-Paid PMI (LPMI)

Some lenders pay PMI upfront in exchange for a slightly higher interest rate (typically 0.25%–0.5% higher). This can make sense if you plan to sell or refinance within 7 years — after that, the accumulated higher interest may exceed what you'd have paid in PMI.

4. VA Loans (Veterans)

VA loans backed by the Department of Veterans Affairs require no PMI regardless of down payment. Eligible veterans and active service members can put 0% down with no PMI — one of the most valuable benefits available in mortgage financing.

5. Request Removal via Appraisal

If your home has appreciated significantly, you may reach 80% LTV faster than scheduled. Ask your lender about requesting a new appraisal — if the appraised value supports 80%+ equity, you can request PMI removal immediately rather than waiting years.

PMI vs FHA MIP: What's the Difference?

FHA loans have Mortgage Insurance Premium (MIP) instead of PMI. Unlike PMI, FHA MIP cannot be cancelled on loans originated after June 2013 where the LTV was above 90% at closing — you'd need to refinance to a conventional loan to remove it. That's a key reason why borrowers who qualify for conventional financing should generally choose it over FHA once they have 10%+ down.