What is Private Mortgage Insurance (PMI)?

What PMI Is and Why Lenders Require It

Here’s the simplest breakdown of private mortgage insurance (PMI): the lender sets the requirement, an insurance company prices out the policy, and the premium ends up on your monthly payment. PMI is a type of mortgage insurance you’re probably required to buy on a conventional loan if your down payment is less than 20% of the purchase price.

If you’re looking at your loan estimate, PMI gets listed as a line item without really going into the details of who it covers. Spoiler alert, it’s the lender, and it covers them in the event you stop making payments. It exists because a smaller down payment means you start with less equity, and your loan is bigger than it would’ve been if you’d put more down. Therefore, in some sense, the lender is taking on more risk without raising your rate to an insane level. Understanding whose position it protects may put you more in control of when it ends.

It may help to consider where PMI sits in the loan itself. The loan officer should be able to find the right product and program for what you’re trying to accomplish, and PMI is one of the terms that gets set at that stage, based on your down payment and credit score. Operations takes over from there, grabs the file, and gets it to closing. Underwriting evaluates your income, credit, and assets along the way, and the PMI rate you’re given reflects what your overall review found. When the loan funds, PMI isn’t a permanent “tax” on your mortgage. You’ll be able to remove the charge when you’ve reached certain requirements.

How Much PMI Costs

A typical monthly PMI charge runs around $30 to $70 per month for every $100,000 you borrow. Two main factors drive where you land: your LTV ratio and your credit score. A higher LTV pushes the PMI cost higher, while a stronger credit score could move it down. The insurer also factors in your loan term and property type, but LTV and credit score have the most impact.

Let’s look at an example. You take out a $225,000 loan with a PMI rate of 1% annually, which is a reasonable middle-of-the-road range for average credit at a 90% LTV. That’s $2,250 per year, or $187.50 a month, which gets added to your payment until you cross the cancellation threshold.

First-time home buyers now put down a median of 10%, the highest down payment average in decades. That’d put you in 90% LTV territory, but you’d be able to cancel it faster than someone who puts down only 3%.

The Three Ways You Can Pay for PMI

PMI can get structured in 3 primary ways: a monthly premium (most common), a single upfront premium, or lender-paid coverage.

A monthly premium is as simple as it sounds, adding the PMI to your monthly payment. It doesn’t require extra cash at closing and stops the moment you hit the cancellation threshold.

With a one-time upfront premium paid at closing, you usually pay a lower total cost over time, but you lose it if you sell the home or refinance before your break-even point.

The final primary structure is lender-paid PMI, where the lender covers the premium. But there’s a trade-off: you take on a higher rate for the life of the loan. Fannie Mae’s Selling Guide notes that lenders choosing less than standard coverage are assessed a loan-level price adjustment (LLPA) based on the LTV ratio, and that typically shows up as your higher rate. It’s permanent too. The rate doesn’t come back down, even if your LTV drops below 80%, because there’s no premium left to cancel.

Each of these ways of doing business come with pros and cons. You can chat with an AmeriSave loan officer to learn about the true cost of all three PMI structures before you actually make a decision.

How to Remove PMI: Your Rights Under Federal Law

This is the real question on your mind, and it’s important, because it can save you money if you’re heads up about it. The Homeowners Protection Act (HPA) is the federal law governing PMI cancellation, and it gives you two paths on two very different timelines.

The first is request-based, at 80% LTV. You’re totally within your rights to ask your servicer to cancel your PMI is scheduled to fall to 80% of the original home value, assuming of course, that your payment history is good, there are no junior liens on the property, and there’s reason to believe the home’s value hasn’t declined since you bought it.

The other path is automatic, at 78% LTV. The CFPB’s guidance is straightforward: your servicer must automatically terminate PMI on the date your principal balance is scheduled to reach 78%, as long as you’re current on payments. The law doesn’t require you to ask.

So basically, the earlier opportunity only works if you take action on it. Your lender isn’t going to call with the exciting news that you’ve reached 80% LTV, and if you assume they will, you’ll end up waiting until they actually have to remove PMI, at 78%. But if you mark your 80% date on the calendar when you close, your amortization schedule will cross that threshold and you can send your written request the same week. That’s a simple step that separates paying PMI for a number of extra months from cutting it off earlier.

But there’s a third scenario and it’s tied to your amortization schedule instead of your LTV. Your lender and servicer must end PMI the month after your reach the midpoint of your amortization schedule. So, the 15-year mark on a standard 30-year loan, even short of 78% LTV. Fannie Mae and Freddie Mac’s guidelines can also offer terms more favorable than the HPA’s minimums, so ask your servicer which standard applies.

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Appreciation Can Help You Reach 80% Faster

But wait, there’s more! And this one’s exciting. Your LTV can drop as you pay down your principal, but it can also fall if your home’s value rises. If you home has appreciated since your purchase, you may already be closer to the 80% LTV than you think, and you can request cancellation once a new appraisal confirms it, typically at your own expense, assuming you’re current on payments.

The FHFA’s Housing Price Index shows US home values have risen almost 40% over recent years and they continue to climb. That matters if your purchase predates this recent run-up, because you may be sitting on more equity than your original schedule accounted for, but you may not have ordered the appraisal that would prove it and cancel your PMI.

How to Avoid PMI Altogether

You have 3 paths to avoid PMI altogether: making a 20% down payment, a piggyback loan, or a government-backed program.

The first is the simplest to break down. If your down payment is 20% or more, you avoid PMI. Simple as that. You start with an 80% LTV and that’s enough to skip the PMI. Typical down payments these days run from 5% to 20%, with some programs allowing as little as 3%. This path fits for some, but not for others.

The second is a piggyback loan, sometimes structured as an 80-10-10, where a second mortgage covers part of the gap between your down payment and the 20%. That keeps your first mortgage at or below 80% LTV so you never need PMI. But there is a trade-off: the second mortgage usually has a higher rate, so you should calculate whether the combined cost of both loans beats what PMI would’ve cost you.

The third is a government-backed loan program, which replaces PMI with its own insurance structure entirely. Let’s take a deeper dive.

Government-Backed Loans: Different Rules, Different Costs

FHA, VA, and USDA loans don’t have “PMI.” Instead, they have program-specific insurance costs.

FHA loans require an upfront mortgage insurance premium, also known as MIP. It’s 1.75% of the base loan amount, plus an annual MIP at about 0.15% to 0.75%, depending on the loan term, loan amount, and LTV. The big difference between PMI and MIP is durability. HUD keeps MIP for the full loan term when your LTV is over 90% on newer FHA loans, and a 10% down payment (or more) limits it to 11 years. PMI always has a cancellation path, but FHA MIP doesn’t in the event your LTV is high.

A VA loan swaps PMI with a one-time funding fee instead of ongoing insurance. The fee is a percentage of the loan amount and varies by loan type, military category, first-time vs. subsequent use, and down payment size. If you’re a veteran receiving VA compensation for a service-based disability, or if you’re a surviving spouse of a veteran who died in service or from a service-based disability, you’re exempt entirely. If you’re eligible for a VA loan product, it’s often the cleanest path for your home loan needs, because there’s no recurring premium at all.

USDA loans charge an upfront guarantee fee of 1% of the loan amount, plus an additional annual fee of 0.35% of the outstanding balance, both lower than the FHA’s similar charges.

The positive thing about these programs is the lower the barrier to entry, but each carries its own cost structure, and the right one depends on your eligibility and how long you plan to stay in the home. An AmeriSave loan officer can help you understand your options before you commit to a loan program anytime.

Don’t sleep on PMI. It’s a real cost that makes your monthly payment more expensive. But you have options to end it as you continue to pay off your loan. PMI protects your lender’s position while your equity is on the low end, and that risk decreases once your equity starts building. Many people, and even lenders explaining this for the first time, describe PMI as if it just falls away on its own, but you can end it earlier, if you take action. Track your LTV against the 80% and 78% thresholds and submit a written request when you cross the first one, instead of waiting for the second, and you can save money.

Here’s the principle behind it all: do the paperwork first, and the rest of the timeline takes care of itself. Track your loan balance, order an appraisal if your home has appreciated, and put the request in writing the day you qualify. Our operations teams evaluate these requests by turning your documents into data the same way we underwrite the loans themselves, so if you make a clean request, it can move fast when it has an appraisal backing it up. Chat with one of our AmeriSave loan officers and you can learn how close you are to dropping your PMI, whether that’s through a paydown, appreciation, or a program that never required it. We’ll help you get to the finish line faster than waiting for the threshold would. That level of program knowledge and speed on the answers to your biggest questions is why borrowers choose AmeriSave.