What Is Private Mortgage Insurance (PMI)?
Private mortgage insurance is a policy that protects the lender — not the borrower — when a conventional loan exceeds 80% loan-to-value. PMI typically costs 0.5% to 1.5% of the loan amount annually, added to the monthly payment. Unlike FHA mortgage insurance, PMI can be cancelled once the borrower reaches 20% equity, and must be automatically terminated at 22% equity under the Homeowners Protection Act.
Key Facts
- The Homeowners Protection Act (HPA) of 1998 requires lenders to automatically terminate PMI when the borrower's equity reaches 22% of the original property value — no borrower action required
- Borrowers can request PMI cancellation at 20% equity, but must have a good payment history and the property must not have declined in value
- PMI premiums typically range from $30 to $150 per month per $100,000 borrowed, depending on credit score, down payment, and loan type — a $350,000 loan might add $100-$500/month
- Lender-paid PMI (LPMI) eliminates the separate premium but is baked into a higher interest rate — and unlike borrower-paid PMI, it cannot be cancelled when equity reaches 20%
- PMI is distinct from FHA mortgage insurance (MIP), which is required for the life of most FHA loans regardless of equity buildup
How Does PMI Work?
When a borrower makes a down payment of less than 20% on a conventional mortgage, the lender faces higher risk — there's less equity cushion if the borrower defaults and the property must be sold. PMI transfers that risk to a private insurance company. If the borrower defaults, the insurer pays the lender's losses up to the coverage amount.
PMI is paid by the borrower but protects the lender. This is a critical distinction — the borrower receives no claim benefit from PMI. It simply enables lenders to approve loans they otherwise wouldn't make at that down payment level.
PMI premiums vary based on several factors:
- Credit score: Higher scores get lower premiums. A borrower with a 760+ score might pay 0.3% annually; a borrower at 680 might pay 1.0%+
- Down payment: Larger down payments (even if below 20%) reduce the premium rate
- Loan-to-value ratio: The higher the LTV, the higher the risk, the higher the premium
- Loan type: Fixed-rate loans generally have lower PMI costs than ARMs
How Do You Cancel PMI?
The Homeowners Protection Act (HPA) establishes three paths to PMI removal:
- Borrower-requested cancellation (at 80% LTV): You can request cancellation when your mortgage balance reaches 80% of the original purchase price. Requirements: current on payments, good payment history (no 30-day lates in the past year, no 60-day lates in the past two years), and the property value has not declined.
- Automatic termination (at 78% LTV): The servicer must automatically cancel PMI when the balance reaches 78% of the original value, based on the original amortization schedule. No borrower action needed.
- Final termination (midpoint): If PMI hasn't been cancelled by the midpoint of the loan term (year 15 for a 30-year mortgage), the servicer must terminate it regardless of LTV — as long as the borrower is current on payments.
Important: these thresholds use the original purchase price or appraised value, not the current market value. If your home has appreciated significantly, you may be able to request early cancellation with a new appraisal showing 20%+ equity — but this is at the lender's discretion, not an HPA requirement.
PMI vs. FHA Mortgage Insurance
PMI and FHA MIP serve the same purpose but work differently:
- PMI (conventional): Can be cancelled at 20% equity. Premium varies by credit score. No upfront premium.
- FHA MIP: Required for the life of the loan on most FHA loans (those with less than 10% down). Includes an upfront premium of 1.75% of the loan amount plus annual premiums of 0.55-1.05%. Cannot be cancelled without refinancing into a conventional loan.
This is why borrowers who can qualify for conventional loans with PMI often save money long-term versus FHA — they can eliminate the insurance cost once they build equity. FHA borrowers who put less than 10% down are locked into MIP payments for the entire loan term.
Why Does PMI Matter for Financial Distress?
PMI adds to the total monthly housing cost, pushing borrowers closer to affordability limits. For a household already stretching to afford a home, PMI can add $100-$400/month to their payment — money that doesn't build equity or provide any benefit to the borrower. In a rising-cost environment where insurance, taxes, and HOA dues are also increasing, PMI compounds the affordability squeeze that the American Distress Index tracks through its Cost Pressure component.
Frequently Asked Questions
How do I get rid of PMI?
Request cancellation from your servicer when your mortgage balance reaches 80% of the original purchase price. You'll need a good payment history and the home value must not have declined. If you don't request it, the servicer must automatically cancel PMI when the balance hits 78% of the original value.
How much does PMI cost?
PMI typically costs 0.5% to 1.5% of the loan amount annually, paid monthly. On a $350,000 mortgage, that's roughly $145 to $440 per month. The exact rate depends on your credit score, down payment size, and loan type. Higher credit scores get significantly lower PMI rates.
Is PMI tax-deductible?
PMI deductibility has been extended and expired repeatedly by Congress. Check current IRS guidance for the applicable tax year. When available, the deduction phases out for households with adjusted gross income above $100,000. Consult a tax professional for your specific situation.
What is the difference between PMI and MIP?
PMI is for conventional loans and can be cancelled at 20% equity. MIP is for FHA loans and generally lasts the life of the loan. FHA MIP also includes an upfront premium of 1.75% of the loan amount. Borrowers who start with FHA can refinance to conventional to eliminate MIP once they have 20% equity.
Can I avoid PMI with less than 20% down?
Yes — some options include piggyback loans (80-10-10 structure), lender-paid PMI (higher interest rate, no separate premium), and VA loans (no mortgage insurance for eligible veterans). Some credit unions and community programs also offer low-down-payment loans without PMI.