PMI Explained: What It Costs and When You Can Drop It

If you put less than 20% down on a conventional loan, your lender will probably require private mortgage insurance, usually shortened to PMI. It protects the lender, not you, and it adds to your monthly payment until you build enough equity to drop it.

What it costs

PMI is priced as a percentage of the loan per year, then divided across twelve months. The rate depends mainly on your loan-to-value ratio (loan amount divided by home price) and your credit score. A smaller down payment and a lower score both increase it. Annual premiums commonly range from a few tenths of a percent to more than 1% of the loan.

A worked example: a $400,000 home with 5% down means a $380,000 loan, a 95% loan-to-value ratio. At an illustrative 0.9% annual rate:

$380,000 × 0.9% ÷ 12 = $285 a month

That amount is on top of principal, interest, taxes and insurance. Your actual quote will differ, and the PMI calculator lets you test different down payments.

When PMI ends

Federal law, the Homeowners Protection Act, sets the rules for conventional loans:

• You can request cancellation once your balance reaches 80% of the home’s original value, provided you are current on payments, have a good payment history, and the property has not declined in value or carries other liens. Your servicer may ask for an appraisal.
• It must end automatically when your balance is scheduled to reach 78% of the original value, as long as you are current.
• Final termination applies at the midpoint of the loan’s amortization term, even if you have not reached 78%, if you are current.

Using the example above, at a 6.5% rate and only scheduled payments, the balance reaches 80% of the original value after about 124 months (a little over ten years), and 78% after about 135 months. PMI paid until 78% would total roughly $38,475. You can shorten that by making extra payments, which cut the balance faster. Use the extra payment calculator to see how much.

Ways to avoid or reduce PMI

• Put 20% down. It avoids PMI and lowers your payment and interest.
• Compare lender-paid PMI. The lender covers it in exchange for a higher interest rate, which does not go away when you would have dropped PMI.
• Pay it up front. Some insurers offer a single premium in place of monthly payments. It is not refundable if you sell or refinance early.
• Reappraise. If your home has gained value, an appraisal may show that you have reached 80% sooner.

FHA mortgage insurance is different

FHA loans have their own mortgage insurance premium, with an upfront premium of 1.75% of the loan plus an annual premium paid monthly. With less than 10% down, the annual premium generally lasts for the life of the loan, and with 10% or more down it lasts 11 years. Many FHA borrowers later refinance into a conventional loan when they have enough equity. The FHA loan calculator includes these premiums.

Is PMI worth paying?

It can be. If waiting years to save a 20% down payment would cost you more in rent or rising prices, PMI may be the price of buying sooner. The key is to plan its removal: know your 80% date, keep your payment history clean, and check your servicer’s cancellation process.

Common questions

Does PMI go away if my home’s value rises?

It can. If your home has appreciated, you may be able to request cancellation based on a new appraisal once your loan balance is at or below 80% of the new value, depending on the servicer’s rules and how long you have had the loan. Ask your servicer what documentation they require and who pays for the appraisal.

Is it better to pay PMI or take a higher rate?

Lender-paid PMI removes the monthly insurance in exchange for a higher interest rate for the life of the loan. It can make sense if you expect to keep the loan only a few years, but it cannot be cancelled later. Compare the total cost over the time you expect to stay.

What if I only have a small down payment?

You still have options: conventional loans with as little as 3% down for some buyers, FHA with 3.5%, VA and USDA with none for eligible borrowers. Each has different mortgage insurance rules, so use the calculators to compare the full payment under each.

Key takeaways

• PMI costs money every month on a conventional loan with less than 20% down.
• You can ask to cancel at 80% of original value, and it ends automatically at 78%.
• FHA insurance follows different rules and often lasts for the life of the loan.