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What Is PMI? When You Pay It, What It Costs, and When You Can Drop It

April 15, 20255 min read

Private Mortgage Insurance (PMI) is a monthly cost paid by the borrower that protects the lender in case of default. Not you — the lender. If you put less than 20% down on a conventional mortgage, you're likely paying it. On a $350,000 loan, PMI typically adds $100–200/month — $1,200–$2,400/year for something that does nothing for you directly.

Why PMI Exists and When It Applies

Lenders require PMI when the down payment is less than 20% of the home's purchase price — meaning the loan-to-value (LTV) ratio exceeds 80%. The insurance compensates the lender if the borrower defaults and the foreclosure sale doesn't fully recover the loan balance.

Conventional loans: PMI required until 20% equity reached
FHA loans: mortgage insurance premium (MIP) — similar concept, different structure, harder to cancel
VA loans: no PMI regardless of down payment (veteran benefit)
Piggyback loans (80-10-10): avoid PMI with a second mortgage covering the gap to 10% down

What PMI Actually Costs

PMI premiums typically range from 0.5% to 1.5% of the original loan amount per year, depending on credit score, down payment size, and loan term.

$200,000 loan at 0.8% PMI: $133/month
$300,000 loan at 0.8% PMI: $200/month
$400,000 loan at 0.8% PMI: $267/month

Higher credit score = lower PMI rate. A 760+ credit score might get 0.5% PMI; a 680 score might pay 1.2% on the same loan. Improving your credit before buying can meaningfully reduce PMI costs over the years it applies.

When and How to Cancel PMI

The Homeowners Protection Act (HPA) gives conventional mortgage borrowers legal rights to cancel PMI:

Automatic cancellation: lender must cancel PMI when LTV reaches 78% based on original amortization schedule — you don't have to ask
Borrower-requested cancellation: you can request cancellation when LTV reaches 80% through payments or appreciation, with a good payment history
Midpoint cancellation: lender must cancel PMI at the loan's amortization midpoint regardless of equity

For borrower-requested cancellation based on appreciation: request a new appraisal to document the increased home value. If your $350,000 home is now worth $440,000, your LTV on a $320,000 remaining balance is 72.7% — well below 80%.

Is It Worth Waiting to Avoid PMI?

The classic debate: wait to save 20% down vs. buy now with less down and pay PMI. The math depends on your rental cost and local home appreciation rate.

Example: saving the extra $30,000 for a full 20% down takes 3 more years. If the home appreciates 5%/year during those 3 years, you've lost $52,500 in equity you could have been building. PMI costs over 3 years: roughly $7,200. The delay cost roughly 7× the PMI cost.

In appreciating markets, buying with PMI and canceling it within 5 years is often better than waiting for a 20% down payment. In flat or declining markets, the calculus shifts. Run the numbers for your specific situation.

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Frequently asked questions

Can I deduct PMI on my taxes?

The PMI deduction has expired and been reinstated multiple times by Congress. As of recent law, it has not been permanently extended. Check current IRS guidance or consult a tax professional for the current year's status. Even when available, it only benefits taxpayers who itemize deductions.

What's the difference between PMI and MIP?

PMI (Private Mortgage Insurance) is for conventional loans and can be cancelled once 20% equity is reached. MIP (Mortgage Insurance Premium) is for FHA loans and works differently: for loans originated after June 2013 with down payments below 10%, MIP is required for the life of the loan. Refinancing to a conventional loan is the main exit strategy.

Does making extra mortgage payments remove PMI faster?

Yes. Extra principal payments reduce your loan balance faster, accelerating the path to 80% LTV. Every extra dollar toward principal pushes the PMI cancellation date earlier. On a $300,000 loan, an extra $200/month could eliminate PMI 2–3 years faster than the standard schedule.

Can my lender refuse to cancel PMI?

They can require conditions — good payment history (no 30-day late payments in the past year, no 60-day lates in the past 2 years), confirmation that the value hasn't declined, and potentially an appraisal at your expense. But under the HPA, they cannot indefinitely refuse a cancellation request that meets the legal thresholds.

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