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HL1Housing Living 101

What PMI Is and Why Your Lender Requires It

By Tanika Patel
8 minute read

PMI is insurance that protects your lender, not you, when you put down less than 20 percent

PMI stands for private mortgage insurance. It is a monthly fee added to your mortgage payment when you borrow more than 80 percent of your home's purchase price. The insurance protects the lender if you stop paying—it does not protect you. PMI is required by law when you put down less than 20 percent, and your lender chooses which insurance company covers the loan.

The cost varies based on three things: how much you borrowed relative to the home's value, your credit score, and the size of your down payment. A buyer with a 10 percent down payment and a 700 credit score will pay more than a buyer with a 15 percent down payment and a 750 credit score on the same loan amount. PMI typically ranges from 0.5 to 1.5 percent of your loan amount per year, but that range shifts with market conditions and individual risk factors.

PMI is separate from homeowners insurance, which you must also carry. Homeowners insurance protects your property and belongings; PMI protects only the lender's financial stake in the loan.

Key Takeaways

  • PMI is required when your down payment is less than 20 percent and is paid monthly as part of your mortgage bill.
  • Your lender selects the PMI company and sets the rate based on your loan-to-value ratio, credit score, and down payment size.
  • You can remove PMI once your loan balance drops to 80 percent of the original home value, but you must request it in writing.
  • Federal law requires your lender to automatically cancel PMI when your loan balance reaches 78 percent of the original purchase price.
  • Refinancing to a lower interest rate does not automatically remove PMI unless you refinance into a loan with 20 percent equity or more.

How PMI is calculated and added to your payment

Your lender calculates PMI based on the loan-to-value ratio (LTV), which is the amount you borrowed divided by the home's purchase price. If you buy a $300,000 home and put down $30,000 (10 percent), you borrowed $270,000. Your LTV is 90 percent. The higher your LTV, the higher your PMI rate, because the lender's risk is greater.

PMI is quoted as an annual percentage of your loan amount. If your loan is $270,000 and your PMI rate is 0.8 percent per year, you pay $2,160 annually, or $180 per month. This $180 is added to your principal and interest payment, property taxes, homeowners insurance, and any HOA fees—all bundled into one monthly bill called your PITI (principal, interest, taxes, insurance) or PITI plus PMI.

The rate you receive depends on the lender's underwriting decision. Two borrowers with the same down payment can receive different PMI rates if their credit scores differ. Your lender will show you the PMI amount in your Loan Estimate, a document you receive within three business days of applying for the mortgage.

When PMI stops and how to request removal

PMI removal happens in two ways: by your request or by automatic cancellation. You can request removal once your loan balance falls to 80 percent of the original purchase price. This usually happens after you have paid down principal for several years, though it can happen faster if your home appreciates and you refinance based on the new value.

To request removal, contact your loan servicer in writing—a phone call or email is not enough. You will need to provide proof that your home's value has not dropped below the original purchase price. This proof can be a recent appraisal (which you pay for, typically $300 to $500) or a broker price opinion (cheaper, but not all lenders accept it). Some lenders allow you to use your county's assessed value if it is recent enough.

Federal law requires your lender to automatically cancel PMI when your loan balance reaches 78 percent of the original purchase price, regardless of whether you request it. Your servicer must notify you of this cancellation date when you first take out the loan and annually thereafter. Automatic cancellation happens on the first day of the month after the 78 percent threshold is reached, assuming you are current on payments.

If you have missed payments, automatic cancellation is delayed. You must be current on your mortgage for at least two months before PMI can be removed, either by request or automatically.

PMI and refinancing: what changes and what does not

Refinancing does not automatically remove PMI. When you refinance, you are taking out a new loan to pay off the old one. If your new loan still requires you to borrow more than 80 percent of your home's current value, PMI continues on the new loan.

However, refinancing can remove PMI if your home has appreciated significantly or if you have paid down enough principal that your new LTV is 80 percent or lower. For example, if you bought a $300,000 home with 10 percent down and your home is now worth $350,000 with a remaining balance of $250,000, your new LTV would be about 71 percent—low enough to avoid PMI on a refinance.

Refinancing also gives you a chance to improve your credit score and potentially lower your PMI rate on a new loan, though this only matters if you are refinancing into a loan that still requires PMI. Always ask your lender whether PMI will be included in the new loan before you commit to refinancing.

PMI on FHA, VA, and USDA loans

Government-backed loans have their own insurance requirements that work differently from PMI. FHA loans require mortgage insurance premium (MIP), which is similar to PMI but mandatory for the life of the loan if your down payment is less than 10 percent. If you put down 10 percent or more on an FHA loan, MIP can be removed after 11 years.

VA loans do not require PMI or MIP, but they do require a funding fee paid at closing (unless you are a surviving spouse of a service member or have a service-connected disability). This fee is a one-time cost, not a monthly payment.

USDA loans require an upfront may provide fee and an annual fee similar to PMI, both paid over the life of the loan. USDA insurance cannot be removed, even after you reach 20 percent equity.

Strategies to avoid or reduce PMI

The most direct way to avoid PMI is to put down 20 percent or more. If that is not possible at purchase, you have other options. Some buyers use a piggyback loan, borrowing a second mortgage for 10 percent of the purchase price and putting down 10 percent in cash, leaving the first mortgage at 80 percent LTV and avoiding PMI entirely. Piggyback loans carry their own interest rate and fees, so compare the total cost against PMI before committing.

Another option is to put down less than 20 percent now and refinance later once your home appreciates or you have paid down enough principal. This works if you can afford the PMI payments in the meantime and if interest rates remain favorable for refinancing.

Some lenders offer lender-paid PMI, where the lender covers the PMI cost in exchange for a higher interest rate on your loan. This can make sense if you plan to sell or refinance within five to seven years, because you avoid monthly PMI payments. If you stay in the home longer, the higher interest rate costs more over time than paying PMI would have.

What happens if you fall behind on PMI payments

PMI is part of your mortgage payment. If you miss a mortgage payment, you are also missing the PMI payment. Missing payments triggers the same consequences: late fees, damage to your credit score, and eventually foreclosure if the delinquency continues.

PMI does not protect you from foreclosure. It protects the lender. If you default on your loan, the insurance company pays the lender the difference between what the home sells for and what you owe. You are still responsible for any shortfall, and the foreclosure remains on your credit report.

Frequently Asked Questions

Can I pay PMI in a lump sum instead of monthly?

Some lenders allow you to pay PMI upfront at closing, rolling it into your loan amount. This removes the monthly payment but increases your total loan balance and the interest you pay over time. Compare the upfront cost against the monthly cost over the years you expect to carry PMI before deciding.

Does PMI cost the same for the entire loan?

No. PMI is recalculated if you refinance into a new loan, because your LTV changes based on the home's current value and your new loan amount. PMI also decreases over time on your original loan as your balance drops, though you do not see this reflected in your payment—your payment stays the same until you request removal or automatic cancellation occurs.

What if my home value drops after I buy it?

You still owe PMI based on your original purchase price, not the current value. PMI removal is tied to your loan balance reaching 80 percent of the original purchase price, not the current market value. If your home loses value, you may be underwater (owing more than the home is worth) and unable to refinance without PMI.

Can I deduct PMI from my taxes?

PMI was tax-deductible for some borrowers in past years, but that deduction expired. Check with a tax professional about your specific situation, as rules change and some states or circumstances may differ.

Do I need PMI if I am buying with a co-borrower?

PMI is based on the loan amount and down payment, not on how many people are on the loan. If you and a co-borrower put down 15 percent together, PMI applies regardless of whether one or both of you are on the mortgage.