What is private mortgage insurance (PMI)?

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, subject to other conditions, when your mortgage balance reaches 80% of the home's original value. That's generally the lower of the purchase price and the appraised value at purchase, or the appraised value at refinancing if you refinanced. 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 generally must automatically cancel PMI on the date the principal balance is scheduled to reach 78% of the original value, provided the borrower is current on payments. 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. May include an upfront premium at closing.
• 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 an annual premium that depends on the loan amount, term and loan-to-value ratio. Annual MIP ends when the FHA loan is paid off or refinanced. Depending on the rules that apply to the loan, it can also end after 11 years or at the end of the loan term, whichever comes first. That requires an original loan amount, excluding financed upfront MIP, of no more than 90% of the home's value.

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 to their monthly payment without paying down principal, though it can help the borrower qualify for a loan they might not otherwise get. In a rising-cost environment where insurance, taxes, and HOA dues are also increasing, PMI compounds the affordability squeeze that surfaces in the required-payment burden the American Distress Index tracks in its Debt Burden domain.