What is PMI (Private Mortgage Insurance)?
Private Mortgage Insurance (PMI) is insurance that protects the lender (not the borrower) when a conventional US mortgage has less than 20 percent equity at origination. It typically costs 0.30 percent to 1.50 percent of the original loan amount per year, paid as a monthly premium with the mortgage, and federal law allows the borrower to cancel it once the loan reaches 80 percent loan-to-value.
Detailed definition
Private Mortgage Insurance is a credit-risk insurance product that lets conventional US lenders extend financing above 80 percent LTV without taking on the full default risk. The borrower pays the monthly premium; if the borrower defaults and the lender takes a loss on foreclosure, the PMI insurer reimburses the lender up to the policy limit. PMI does not protect the borrower or build any equity for them. The same six US mortgage insurers (MGIC, Radian, Essent, Arch, Enact, and National MI) write most policies and publish broadly similar rate cards.
PMI exists because Fannie Mae and Freddie Mac will not buy a conventional loan above 80 percent LTV unless it carries mortgage insurance. That makes PMI effectively mandatory for the millions of US buyers who put 3 to 19 percent down on a conventional loan. The borrower has structural choices that affect the cost: borrower-paid monthly PMI (BPMI, the default), borrower-paid single-premium PMI (one upfront payment, sometimes split with seller credits), lender-paid PMI (LPMI, where the lender prices the insurance into a higher rate), or split-premium PMI (upfront plus monthly).
Cancellation is governed by the Homeowners Protection Act (HPA) of 1998, which set the borrower-request rule at 80 percent original LTV and the automatic-termination rule at 78 percent scheduled LTV. Both thresholds are based on the original purchase price (not current appraisal) unless the borrower invokes the appreciation rules, which require 2 years of seasoning and a lender-approved appraisal. The HPA does not apply to FHA, VA, USDA, or jumbo loans; each has its own mortgage insurance rules.
Formula
Annual PMI premium = Original loan amount x PMI rate Monthly PMI premium = Annual premium / 12 Time to BPMI auto-cancel ~ months until scheduled balance = 0.78 x original purchase price
- PMI rate = published rate from a mortgage insurer's grid, indexed by FICO, LTV, DTI, loan type, and occupancy. Typical range 0.30 percent to 1.50 percent per year.
- Original loan amount = balance at closing. PMI premium is based on this even as the loan amortises (BPMI does not decline with balance).
- Scheduled balance = the amortisation-schedule balance at month N. Auto-termination uses the schedule, not the actual paid-down balance.
- Original purchase price = the LTV denominator the HPA uses for borrower-request (80 percent) and automatic (78 percent) cancellation.
Worked example (2026 conventional purchase)
Suppose a US buyer purchases a $500,000 home in 2026 with a 10 percent down payment ($50,000) and a $450,000 30-year fixed conventional mortgage at a 6.50 percent rate. FICO 720, DTI 38 percent. The mortgage insurer quotes a 0.45 percent BPMI rate.
- Original LTV: $450,000 / $500,000 = 90 percent.
- Annual PMI: $450,000 x 0.0045 = $2,025.
- Monthly PMI: $2,025 / 12 = $168.75 added to the mortgage payment.
- Borrower-request threshold (80 percent of $500,000): $400,000 balance. Reached around month 64 on the amortisation schedule.
- Automatic termination threshold (78 percent of $500,000): $390,000 balance. Reached around month 78.
- Total PMI paid before request-based cancellation: $168.75 x 64 = $10,800. Extra principal payments can pull this in materially.
Common pitfalls
- Assuming PMI cancels automatically at 20 percent equity from appreciation. The HPA's automatic rule uses the original purchase price, not the current appraised value. You must request appreciation-based cancellation in writing and pay for a lender-approved appraisal.
- Missing the request-based 80 percent cancellation. Servicers must terminate automatically at 78 percent, but the 80 percent line opens a 2-year-earlier window if you ask. Mark the date on the amortisation schedule and submit the written request.
- Picking LPMI without doing the math. Lender-paid PMI removes the line-item premium but bakes a higher rate into the loan for its full term, which often costs more than 5 to 7 years of BPMI for a borrower planning to hold the loan long-term.
- Confusing PMI with FHA MIP. FHA MIP applies for the full loan term in most cases and cannot be cancelled by hitting 80 percent LTV. The only way to drop FHA MIP is to refinance into a conventional loan.
- Forgetting the HPA only covers primary residences. Second homes and investment properties have their own PMI cancellation rules set by Fannie / Freddie servicing guides, often with higher thresholds.
- Ignoring the loan-term midpoint rule. If you somehow never hit the 78 percent LTV line, BPMI must still cancel at the midpoint of the loan term (year 15 of a 30-year mortgage), per the HPA.
Related terms
Related calculators on 3Tej
Model your PMI cost and cancellation date with these free calculators:
Frequently asked questions
How much does PMI cost?
PMI typically runs 0.30 percent to 1.50 percent of the original loan amount per year, billed as a monthly premium with the mortgage payment. The exact rate depends on FICO, LTV, debt-to-income, loan term, and loan type. On a $400,000 loan at 0.50 percent, PMI costs $2,000 per year (about $167 per month) until it cancels.
How long does PMI last?
Under the federal Homeowners Protection Act of 1998, the servicer must automatically terminate PMI when the loan's scheduled LTV reaches 78 percent of the original purchase price (assuming current on payments). The borrower can request manual cancellation at 80 percent LTV. Final cancellation at the midpoint of the loan term is also mandatory regardless of LTV (15-year mortgage midpoint is year 7.5).
Is PMI tax-deductible?
PMI deductibility has expired and been reinstated several times. The mortgage insurance premium deduction lapsed at the end of 2021 and has not been reinstated as of the 2025 tax year. Check the current IRS Schedule A instructions for the tax year you are filing.
How do I avoid PMI?
Common paths: put 20 percent or more down on a conventional loan; use a piggyback structure (80/10/10 split with a second-lien HELOC); take a VA loan (no monthly mortgage insurance for eligible veterans); or accept lender-paid PMI (LPMI), which raises the interest rate but eliminates the line-item premium.
Is FHA mortgage insurance the same as PMI?
No. FHA loans carry a separate Mortgage Insurance Premium (MIP) with an upfront 1.75 percent of the loan amount plus an annual premium of 0.15 to 0.75 percent (most borrowers pay 0.55 percent). FHA MIP lasts the full loan term unless the borrower put 10 percent or more down, in which case it drops off after 11 years. FHA MIP cannot be cancelled the way conventional PMI can.
Can I cancel PMI if my home value rises?
Yes, but with extra steps. After 2 years of seasoning, most lenders allow appreciation-based PMI cancellation if a new appraisal shows the LTV is at or below 75 percent (some require 80 percent). After 5 years the appraisal-based threshold drops to 80 percent. Send a written cancellation request and order the lender-approved appraisal.
Sources and further reading
- Homeowners Protection Act of 1998, 12 USC 4901 et seq. - the cancellation statute.
- Consumer Financial Protection Bureau, How can I cancel my private mortgage insurance (PMI)?.
- Fannie Mae, Selling Guide B7-1-02: Coverage Requirements for Mortgage Insurance.
- HUD, FHA MIP rates and durations - the comparison to PMI.
- CFPB, Owning a Home: Closing on a House and Mortgage Insurance.