What Is PMI? Private Mortgage Insurance Explained

Private mortgage insurance, usually shortened to PMI, is a policy on a conventional home loan that protects the lender, not you, if you stop paying. Lenders typically require it when you put down less than 20% of the purchase price, because the loan-to-value ratio is then high enough that a foreclosure could leave the lender with a loss.

PMI is one reason a small down payment can raise the full monthly housing cost even when the interest rate looks similar to a 20% down quote. It is also temporary on most conventional loans if you keep paying and the balance falls, or if the home’s value rises enough and you refinance or request cancellation under the servicer’s rules. This guide explains how PMI is charged, how it differs from FHA insurance, when it can end, and what it does not decide about how much house you should buy.

Why lenders require PMI

A mortgage is secured by the home. If you default, foreclosure is slow and expensive. If you put 5% down and prices flatten or fall, the unpaid balance plus costs can exceed the sale proceeds. PMI shifts some of that lender loss risk to an insurer. You pay for it, but you are not the beneficiary the way you are with homeowners insurance. It does not rebuild a kitchen after a fire, and it does not replace an emergency fund.

Loan-to-value is the core trigger.

At purchase, value is usually the lesser of the purchase price and the appraised value. A $400,000 price with $20,000 down is a $380,000 loan and 95% LTV. Conventional programs often require PMI above 80% LTV. Some second-lien or piggyback structures try to avoid PMI by splitting the financing. Those structures have their own rates and risks. They are not automatically cheaper.

How PMI is typically billed

Monthly, single-premium, and lender-paid

On many conventional loans, PMI is a monthly amount added to principal, interest, taxes, and insurance. The premium depends on LTV, credit score, loan term, occupancy, and whether the rate is fixed or adjustable. Lower scores and higher LTV usually mean a higher premium.

Some loans use borrower-paid monthly PMI. Some use a single premium at closing, in cash or financed. Lender-paid PMI can appear as a higher interest rate instead of a separate line. You still pay. A slightly higher rate for 30 years can cost more than a temporary monthly premium that later drops off. Your Loan Estimate should show how PMI is collected. If the payment feels higher than a calculator run with taxes and insurance only, missing PMI is a common reason. Quotes differ by lender. Compare the full payment, APR, and when PMI can be removed.

Conventional PMI versus FHA mortgage insurance

FHA loans are insured by the Federal Housing Administration. Borrowers pay an upfront mortgage insurance premium and an annual premium usually collected monthly. That is not private PMI. Conventional PMI is built to end when equity is high enough. On many FHA loans with less than 10% down, annual mortgage insurance lasts as long as you keep that FHA loan, unless you refinance into conventional credit and pay a new round of closing costs.

VA and USDA loans have their own funding fees or guarantee structures. They are not PMI. A conventional 5% down loan with PMI and an FHA 3.5% down loan are different insurance regimes. A lower down payment is not free in either program.

When PMI can be canceled or automatically terminate

Requested cancellation versus automatic termination

For many conventional loans covered by the Homeowners Protection Act, two events matter. You can often request cancellation when the scheduled balance reaches 80% of original value, if you are current. Automatic termination is generally required at 78% of original value, again if you are current. Original value is usually the purchase-price-and-appraisal figure from origination, not a new market value.

If the home has appreciated, current LTV on a new appraisal may already be under 80% while the servicer’s original-value calendar still shows PMI. You may need to request cancellation, possibly with a new appraisal, or refinance. If value has not risen, extra principal can reach the threshold sooner. Servicers can deny a request after late payments or with a subordinate lien. Ask in writing how they calculate the 80% and 78% points.

PMI is priced for the lender’s risk at a high loan-to-value ratio. Once that ratio falls far enough under the rules of your loan, the monthly premium is meant to stop. Until then it is part of the housing payment, not an optional add-on you can skip.

A worked example of 10 percent versus 20 percent down

The figures below are an illustrative example with labeled assumptions, not a lender quote.

Assume a $360,000 purchase, a 30-year conventional fixed rate of 6.50%, and owner occupancy. Taxes and homeowners insurance are assumed to total $450 a month in both scenarios so the comparison isolates financing.

Scenario A: 20% down. Down payment is $72,000. Loan amount is $288,000. No PMI. Principal and interest are about $1,821. Full illustrated housing payment is about $2,271 plus any HOA.

Scenario B: 10% down. Down payment is $36,000. Loan amount is $324,000. Principal and interest are about $2,047. Assume monthly PMI of $95 for this example. That PMI figure is an assumption for teaching, not an average from a survey. Full illustrated housing payment is about $2,592 plus any HOA.

The 10% down path preserves $36,000 of cash at closing compared with 20% down, before closing costs. It adds about $321 a month in this example from a larger loan plus PMI. Whether that tradeoff is sensible depends on the need for reserves, moving costs, or remaining high-interest debt, and on how long PMI lasts. A mortgage calculator can show the principal-and-interest difference. You still have to add a PMI estimate from an actual Loan Estimate.

Other ways people try to avoid or reduce PMI

Saving toward 20% is the straightforward path. Some buyers use a piggyback second mortgage so the first lien stays at 80% LTV. The second lien often has a higher rate. Compare the combined payment to a single loan with PMI. Lender-paid PMI trades a separate premium for a higher rate. Extra principal on borrower-paid PMI can shorten the PMI period. Extra principal on lender-paid PMI does not remove the rate increase. Gifts and assistance programs can change LTV if they are documented and allowed.

When you compare offers, ask each lender:

• Whether PMI is borrower-paid monthly, single-premium, or lender-paid
• The monthly PMI amount, if any, on the Loan Estimate
• When you can request cancellation and when automatic termination applies
• How a piggyback or a larger down payment would change the full payment

What PMI does not decide

PMI does not tell you how much house you can afford. Affordability still depends on income, debts, cash reserves, taxes, insurance, and maintenance. A loan that qualifies with PMI can still be too large if closing would empty your emergency fund. This guide does not forecast home prices. Buying with 10% down in the hope that appreciation will cancel PMI quickly is a bet. Prices can also stall. PMI also does not replace homeowners insurance, flood insurance where required, or disability coverage that would help you keep paying if you cannot work.

A mortgage calculator will not know your PMI rate unless you enter a number. It cannot choose FHA, conventional, VA, or USDA for you, and it cannot tell you whether to delay a purchase to save a larger down payment. If you already have PMI, read the servicing disclosure on cancellation and automatic termination, then track the balance against original value. If you are shopping, compare full payments, cash to close, and the path off of mortgage insurance.