PMI Explained: What It Is, What It Costs, and How to Drop It
Private mortgage insurance can cost $1,500–$5,000 per year and protects the lender, not you. Here's how to minimize it and three legitimate ways to get rid of it early.
What PMI is and isn't
Private Mortgage Insurance (PMI) is insurance the lender requires when you put less than 20% down on a conventional mortgage. You pay; the lender is the beneficiary. If you default and they lose money on the foreclosure sale, PMI covers their loss. It does not protect you, your equity, your credit, or your future ability to buy.
PMI is a cost of borrowing without 20% equity. It is not a scam, but it is a transfer of money from your pocket to an insurer with zero direct benefit to you — so minimizing and ending it as quickly as legally possible is good financial hygiene.
What PMI costs
PMI rates depend on credit score and loan-to-value ratio (LTV):
| Down Payment | Credit 760+ | Credit 720 | Credit 680 | Credit 640 |
|---|---|---|---|---|
| 3% | 0.50% | 0.78% | 1.05% | 1.45% |
| 5% | 0.32% | 0.55% | 0.75% | 1.10% |
| 10% | 0.22% | 0.35% | 0.55% | 0.80% |
| 15% | 0.17% | 0.28% | 0.40% | 0.60% |
On a $400,000 loan, that's:
- $400k × 0.78% = $3,120/year ($260/month) at 720 credit + 3% down
- $400k × 0.22% = $880/year ($73/month) at 760 credit + 10% down
PMI is calculated annually on your original loan amount at most lenders, divided by 12 and added to your monthly payment.
Why high credit + bigger down payment matters
The pricing table above shows the double benefit of better preparation. A buyer at 760 credit putting 10% down pays less than 1/4 the PMI of a buyer at 640 credit putting 3% down. Improving your credit before applying is one of the cheapest financial wins available.
FHA's "MIP" — the worse cousin of PMI
FHA loans use Mortgage Insurance Premium (MIP), which differs from conventional PMI in two ugly ways:
- Up-front MIP of 1.75% of loan amount, financed into the mortgage
- MIP is permanent for the life of the loan if your down payment is under 10%
The only way to drop MIP if you put 3.5% down on FHA: refinance into a conventional loan. Most FHA borrowers refinance to conventional once they hit 20% equity — usually 4–6 years after purchase between appreciation and paydown.
If you put 10%+ down on an FHA loan, MIP drops at 11 years. Still worse than conventional, which drops as early as month 1 with appreciation.
How to drop conventional PMI: three paths
Path 1: Automatic termination at 78% LTV
Under federal law (Homeowner's Protection Act of 1998), lenders must automatically drop PMI when your loan balance reaches 78% of the original purchase price (not current value), on the scheduled amortization date, assuming you're current on payments.
This is the latest you'll ever pay PMI. On a $400k home with 5% down, it takes about 11 years to amortize to 78% at standard payment schedule. Automatic but slow.
Path 2: Borrower-initiated cancellation at 80% LTV
You can request cancellation when your balance reaches 80% of the original purchase price — earlier than 78%. Requirements:
- Written request to the lender
- Current on payments (no 30-day late in the past 12 months, no 60-day late in past 24)
- Lender may require a current appraisal (you pay, ~$500)
- No second mortgages or other liens against the property
If the appraisal confirms the home is worth at least 80% of the loan amount, PMI must drop. This is the standard path for borrowers who put down 10–15% — typically 4–7 years.
Path 3: Cancellation based on current value (the fast path)
Most lenders allow PMI cancellation based on current market value, not original purchase price, after you've held the loan for at least 2 years (5 years if you have less than 75% equity). You order an appraisal; if it shows 80% LTV based on today's value, PMI drops.
This is huge in appreciating markets. Buyer puts 10% down on a $400k home in 2024; by 2026 the home is worth $480k. The loan balance is now ~$352k, which is 73% of $480k. PMI cancels with a single appraisal — years ahead of the original schedule.
How to time the request
- Pull your loan amortization schedule from your lender's portal.
- Check your local home value (Zillow, Redfin, recent comps).
- Calculate current LTV = current loan balance / current home value.
- If under 80%, write to the lender requesting PMI cancellation. They'll order an appraisal at your cost.
- If under 78% by amortization alone, lender drops PMI automatically.
Don't wait for the lender to notice. They have no incentive to do it for you.
Lender-paid PMI: tempting but pricey
Some lenders offer "Lender-Paid Mortgage Insurance" (LPMI) — they pay the PMI premium in exchange for a 0.25–0.50% higher interest rate for the life of the loan. Pros: no separate PMI line item, lower monthly payment in some cases. Cons: the higher rate never goes away, even after you'd otherwise have dropped PMI.
Math check: LPMI usually wins for borrowers who'll refinance or sell within 4 years. Standard PMI usually wins for borrowers staying 10+ years.
Piggyback (80-10-10) loans
An older alternative to PMI: split the financing into:
- First mortgage: 80% of price
- Second mortgage / HELOC: 10% of price
- Down payment: 10%
You avoid PMI on the first mortgage entirely (it's at 80% LTV from day 1). The second mortgage usually has a higher rate but is tax-deductible if used for home purchase. Was very popular in 2003–2007; less so today as PMI has gotten cheaper.
Worth running the math vs. straight PMI; saves money in some scenarios, especially for borrowers in higher tax brackets.
What never to do
- Skip extra principal payments to "avoid wasting them" — they reduce PMI by reducing the balance. Always worthwhile if rate is above 5%.
- Hide PMI from your offer math. A 3% down loan with PMI may actually cost more monthly than waiting 6 months to put 10% down.
- Accept LPMI without calculating — sometimes worse, sometimes better.
- Forget to request cancellation once you cross 80%. Lenders won't do it for you.
The bottom line
PMI is the cost of buying without 20% down. It's not evil; it's not free. Track your LTV monthly, request cancellation the moment you cross 80%, and don't carry PMI longer than the law requires. A $250/month PMI payment dropped at year 4 instead of year 11 saves over $20,000 — pure money in your pocket.