Private mortgage insurance, or PMI, is a monthly charge that protects the lender when you put down less than 20% on a conventional loan. It does nothing for you directly, so canceling it as soon as you are allowed is one of the easiest ways to lower your payment. Federal law gives you specific rights to remove PMI, and knowing them can save thousands.
Why lenders require it
When your down payment is under 20%, your loan-to-value ratio (LTV) is above 80%, which means less of a cushion if the lender ever has to foreclose and sell. PMI insures the lender against that shortfall, and the premium is passed to you, usually as part of your monthly payment. Cost typically ranges from about 0.3% to 1.5% of the loan amount per year, driven by your credit score and down payment. It is entirely separate from homeowners insurance, which protects the property itself.
Your right to request cancellation
Under the federal Homeowners Protection Act, you can ask your servicer to cancel PMI once your balance reaches 80% of the home's original value, based on the original amortization schedule. You generally must be current on payments and have a good payment history, and the lender may require an appraisal to confirm the home has not lost value. If your extra payments push you to 80% ahead of schedule, you can request cancellation sooner. Always make the request in writing and keep records.
Automatic termination
Even if you never ask, the servicer must automatically terminate PMI when your balance is scheduled to hit 78% of the original value, provided you are current on payments. There is also a midpoint rule: if you reach the halfway point of the loan term and PMI is still in place, it must end regardless of the balance. These protections apply to most borrower-paid PMI on conventional loans for a primary residence. Investment properties and certain loans can follow different rules.
Faster ways to drop it
If your home has appreciated, you may reach 80% LTV on current value long before the original schedule, and some servicers allow cancellation based on a new appraisal you pay for. Making extra principal payments accelerates the date you hit the cancellation threshold. A cash-out or rate-and-term refinance can also eliminate PMI if the new loan is at or below 80% LTV. Remember that FHA mortgage insurance follows entirely different rules and often cannot be canceled without refinancing.
You buy a $350,000 home with 10% down, so your $315,000 loan starts at 90% LTV with PMI of about $130 a month. Once the balance falls to $280,000 (80% of the original value), you can request cancellation in writing. If you never ask, the servicer must drop it automatically at $273,000, which is 78% of the original value.
Key takeaways
- PMI protects the lender, not you, and applies to conventional loans with less than 20% down.
- You can request cancellation at 80% loan-to-value based on the original amortization schedule.
- Servicers must automatically end PMI at 78% LTV if you are current on payments.
- Home appreciation or extra payments can let you drop PMI early, sometimes with a new appraisal.
- FHA mortgage insurance is not the same as PMI and usually requires a refinance to remove.
Common mistakes
- Waiting for automatic termination at 78% when you could have requested cancellation at 80% months earlier.
- Assuming FHA mortgage insurance works like PMI and can be dropped at 80% equity, when it often cannot.
- Forgetting to make the cancellation request in writing and to stay current on payments beforehand.
FAQ
Does PMI ever benefit the borrower?
Indirectly, yes. PMI lets you buy with far less than 20% down, so you can become a homeowner sooner rather than waiting years to save a full down payment. The premium is the price of that access.
Can I avoid PMI without 20% down?
Some lenders offer lender-paid PMI baked into a higher rate, or a piggyback second loan to cover part of the down payment. Each has costs, so compare the total expense against simply paying PMI until you reach 80% LTV.