Private Mortgage Insurance (PMI) Explained: How It Works, What It Costs, and When It Can Be Removed

Private mortgage insurance, commonly called PMI, is an important part of many conventional mortgages. Borrowers may encounter PMI when purchasing a home with a relatively small down payment or refinancing a property with limited equity. Although PMI is included in the cost of some mortgages, many borrowers are unsure about why it is required, how it affects monthly payments, and when it can be removed.

Understanding PMI can help homebuyers compare mortgage costs more accurately and understand how their monthly payment may change as they build equity. PMI is different from homeowners insurance, mortgage protection insurance, and other forms of insurance associated with homeownership. It generally protects the lender against losses if the borrower fails to repay the mortgage rather than protecting the homeowner from property damage.

This guide explains how private mortgage insurance works, when it is typically required, how PMI affects a mortgage payment, and the circumstances under which it may be canceled or terminated.

What Is Private Mortgage Insurance?

Private mortgage insurance is insurance associated with certain conventional mortgages. It reduces the lender's risk when a borrower finances a relatively high percentage of a property's value.

For many conventional mortgages, PMI may be required when the borrower's down payment is less than 20% of the home's purchase price. The exact requirement and cost can vary based on factors such as the loan-to-value ratio, loan characteristics, borrower qualifications, and the mortgage insurance provider's requirements.

PMI should not be confused with homeowners insurance. Homeowners insurance generally protects against covered risks involving the property, while PMI protects the lender against certain losses associated with borrower default.

The Consumer Financial Protection Bureau explains that mortgage insurance can increase the cost of a mortgage but can also allow borrowers to obtain financing without making a large down payment.

Why Is PMI Required on Some Mortgages?

The amount of equity a borrower has in a property is an important factor in mortgage risk. A borrower who makes a smaller down payment initially finances a larger percentage of the property's value.

For example, consider a home purchased for $400,000. A 20% down payment would be $80,000, leaving a $320,000 mortgage. A 5% down payment would be $20,000, leaving a $380,000 mortgage.

The second scenario represents a higher loan-to-value ratio because the borrower is financing a larger percentage of the home's value. PMI may be used on an eligible conventional mortgage to provide additional protection to the lender in that situation.

PMI therefore does not mean that the borrower has done something wrong or that the property is automatically considered unsafe. It is a financing cost associated with certain loan-to-value levels.

How Does Loan-to-Value Ratio Relate to PMI?

Loan-to-value ratio, or LTV, compares the mortgage balance with the applicable value of the property. It is commonly expressed as a percentage.

The basic calculation is:

LTV = Mortgage Amount ÷ Property Value × 100

For example, if a borrower purchases a $300,000 home and makes a $30,000 down payment, the initial mortgage amount is $270,000.

Using the purchase price as the applicable value:

$270,000 ÷ $300,000 = 90% LTV

Because the borrower is financing 90% of the property's value, the loan has 10% initial equity. Depending on the mortgage program and other requirements, PMI may apply.

As the borrower makes principal payments, the mortgage balance generally declines. This can reduce the LTV over time, although the exact pace depends on the loan's amortization schedule and any additional principal payments.

How Does PMI Affect the Monthly Mortgage Payment?

When PMI is required, the premium becomes an additional mortgage-related cost. Depending on the structure of the mortgage insurance, the premium may be incorporated into the monthly payment, paid upfront, or handled through another permitted arrangement.

A simplified monthly housing payment can include:

• Principal

• Interest

• Property taxes

• Homeowners insurance

• Private mortgage insurance, when applicable

• Homeowners association dues or other property-related expenses, when applicable

Not every borrower has all of these costs included in the mortgage payment. For example, property taxes and homeowners insurance may be handled through an escrow account, while association dues are often paid separately.

When estimating the cost of a conventional mortgage, borrowers should therefore look beyond principal and interest and determine whether PMI will apply.

Ultimate Mortgage's mortgage payment calculator can be used to estimate principal-and-interest payments, but borrowers should separately consider applicable mortgage insurance, property taxes, homeowners insurance, and other housing expenses.

What Determines the Cost of PMI?

There is no single PMI rate that applies to every borrower. The premium can vary based on characteristics of the mortgage and borrower.

Factors that can influence PMI costs may include:

• The loan-to-value ratio

• The loan amount

• The type of mortgage

• The borrower's credit profile

• Whether the property is a primary residence or another property type

• The insurance provider's underwriting requirements

• The structure of the mortgage insurance

A borrower with a higher LTV may have different mortgage insurance costs from a borrower with a lower LTV. Similarly, two borrowers purchasing homes at the same price may have different PMI costs because their mortgage and credit characteristics differ.

For this reason, borrowers should use the actual mortgage insurance amount shown in their loan disclosures rather than relying on a general percentage as a precise estimate.

Can PMI Be Avoided by Making a Larger Down Payment?

A larger down payment can reduce the initial LTV and may eliminate the need for PMI on many conventional mortgages when the borrower reaches the applicable equity threshold.

For example, a borrower who makes a 20% down payment finances approximately 80% of the home's value. A borrower who makes a 10% down payment finances approximately 90% of the home's value.

However, choosing a down payment should involve more than simply considering whether PMI applies. A larger down payment also means committing more cash to the property at closing. Borrowers should consider their emergency reserves, closing costs, moving expenses, expected repairs, and other financial obligations.

There is no universal down-payment amount that fits every household. The effect of a larger down payment should be evaluated alongside the complete mortgage structure and the borrower's financial circumstances.

Is PMI the Same as FHA Mortgage Insurance?

No. PMI and mortgage insurance associated with government-backed loan programs are not identical.

Private mortgage insurance is generally associated with conventional mortgages. FHA loans use mortgage insurance under FHA rules, which can include an upfront mortgage insurance premium and an annual mortgage insurance premium collected according to the applicable requirements.

The rules governing cancellation or duration can therefore differ significantly between conventional PMI and FHA mortgage insurance.

This distinction is important when comparing loan programs. A borrower should not assume that reaching a particular equity level will produce the same mortgage-insurance result across conventional, FHA, VA, USDA, and other financing programs.

When Can PMI Be Canceled?

For many mortgages covered by the federal Homeowners Protection Act, borrowers have the right to request cancellation of borrower-paid PMI when the mortgage principal balance reaches the applicable 80% threshold based on the property's original value, subject to the law's requirements.

The CFPB explains that, for covered mortgages on single-family principal residences, a borrower can generally request cancellation when the principal balance is scheduled to reach 80% of the home's original value. A borrower may also be able to request cancellation earlier if additional principal payments bring the balance to the applicable 80% level.

There are important conditions. The borrower generally must request cancellation in writing, have a good payment history, be current on mortgage payments, and satisfy applicable requirements concerning subordinate liens and evidence that the property's value has not declined below the original value.

The specific requirements should be confirmed with the mortgage servicer because not every mortgage is subject to identical PMI rules.

What Does “Original Value” Mean for PMI?

The original value used for PMI purposes is not necessarily the property's current market value.

Under the federal PMI cancellation rules described by the CFPB, original value generally means the lower of the home's purchase price or appraised value at the time of purchase. For a refinance, the applicable original value generally relates to the property's appraised value when the refinance was completed.

This distinction matters because homeowners may see their property's market value increase substantially after purchase. An increase in market value does not automatically mean the homeowner can use that higher value under every PMI cancellation method.

Some mortgage investors may provide additional cancellation options based on current property value and other criteria, but those requirements can vary.

When Does PMI Automatically Terminate?

For many covered conventional mortgages, PMI is generally scheduled to terminate automatically when the principal balance is first scheduled to reach 78% of the property's original value, provided the borrower is current on the mortgage payments.

This is different from borrower-requested cancellation at 80%.

The 80% point generally relates to a borrower's right to request cancellation when the applicable requirements are satisfied. The 78% point generally relates to automatic termination under federal law for covered mortgages, assuming the applicable conditions are met.

Borrowers should review their PMI disclosure and mortgage-servicing information rather than assuming that the exact timing will be identical for every loan.

What Happens at the Midpoint of the Mortgage?

Federal rules also provide for termination of PMI at the midpoint of the loan's original amortization schedule in certain circumstances, even if the principal balance has not reached 78% of the property's original value.

For example, the midpoint of a 30-year amortization schedule is generally 15 years. If the applicable conditions are met and PMI has not already been canceled or terminated, the federal rule can require termination after the midpoint.

This provision is particularly relevant to mortgages with payment structures that cause principal to decline more slowly than under a standard fully amortizing mortgage.

Can PMI Be Removed Because the Home's Value Increased?

In some circumstances, an increase in the property's value may support an earlier PMI cancellation request, but the rules depend on the mortgage investor, servicer, loan type, seasoning requirements, and applicable valuation standards.

Some conventional mortgage guidelines permit borrowers to request cancellation based on current property value if specified requirements are satisfied. A new appraisal or other permitted valuation may be required.

Borrowers should not assume that simply estimating a home's current market value is sufficient. The servicer may require a specific valuation method and documentation before considering a cancellation request.

Does Paying Extra Toward Principal Help With PMI?

Additional principal payments can reduce the mortgage balance faster than scheduled payments. Because PMI cancellation is generally connected to the relationship between the mortgage balance and property value, reducing the principal balance may allow a borrower to reach a qualifying LTV threshold sooner.

For example, suppose a borrower has a mortgage balance of $285,000 on a property with an applicable original value of $350,000. An additional principal payment can reduce the outstanding balance and bring the borrower closer to the applicable cancellation threshold.

However, making additional principal payments should be evaluated in the context of the household's complete financial situation. Using cash to reduce mortgage principal may affect emergency savings, other debts, investments, or upcoming expenses.

What Is Lender-Paid Mortgage Insurance?

Borrower-paid PMI is not the only mortgage-insurance structure. Some mortgages may use lender-paid mortgage insurance, in which the lender pays the mortgage insurance premium under the applicable arrangement.

Although the borrower may not see a separate monthly PMI charge, lender-paid mortgage insurance does not mean that the insurance cost disappears. The overall loan pricing and structure can differ from a mortgage using borrower-paid PMI.

Fannie Mae documentation distinguishes between borrower-paid mortgage insurance and lender-paid mortgage insurance. Under the cited Fannie Mae structure, borrower-paid mortgage insurance can terminate when the applicable LTV threshold is reached, while lender-paid mortgage insurance has different treatment.

For this reason, borrowers should compare the complete cost of the mortgage rather than focusing only on whether a separate PMI line appears on the monthly statement.

PMI and Refinancing

PMI can also be relevant when refinancing a conventional mortgage. A refinance replaces or modifies existing mortgage financing, and the new loan's LTV and program requirements can determine whether mortgage insurance applies.

If a homeowner has built substantial equity since the original purchase, the new loan may have a lower LTV than the original mortgage. Depending on the refinance structure and applicable requirements, this may affect whether PMI is required.

Homeowners considering a mortgage refinance should compare the complete costs of the new loan, including interest, closing costs, mortgage insurance, and the expected period of time they plan to keep the loan.

How to Determine Whether PMI Is Included in Your Mortgage

Borrowers can review their mortgage documents and monthly statements to determine whether PMI is part of their loan costs.

Useful documents may include:

• The Loan Estimate received during the application process

• The Closing Disclosure provided before closing

• The initial mortgage agreement

• The PMI disclosure provided with the mortgage

• Monthly mortgage statements

• Annual mortgage or servicing statements

If the documents are unclear, the mortgage servicer can provide information about the current PMI amount, cancellation requirements, and applicable termination date.

Questions to Ask About PMI Before Choosing a Mortgage

Borrowers comparing conventional mortgage options may want to ask:

• Will PMI be required for this loan?

• How much will the PMI cost each month?

• Is the mortgage insurance borrower-paid or lender-paid?

• What is the initial loan-to-value ratio?

• When can PMI cancellation be requested?

• What conditions must be met before cancellation?

• When is PMI scheduled to terminate automatically?

• Can additional principal payments affect the cancellation date?

• Can current property value be considered for cancellation?

• What documentation would be required?

These questions can help borrowers understand the mortgage insurance component before comparing the total cost of different loan structures.

Common Misunderstandings About PMI

PMI Protects the Homeowner

Generally, PMI protects the lender rather than the homeowner from certain losses associated with borrower default. It should not be confused with homeowners insurance, which addresses covered risks involving the property.

PMI Always Lasts for the Entire Mortgage

Borrower-paid PMI on many covered conventional mortgages can be canceled or automatically terminated when applicable requirements are met. However, the rules differ by loan type and mortgage-insurance structure.

20% Equity Always Means PMI Disappears Immediately

Reaching 20% equity does not necessarily mean PMI stops automatically on that exact day. Borrower-requested cancellation and automatic termination operate under different rules. The applicable mortgage documents and servicing requirements should be reviewed.

All Mortgage Insurance Works the Same Way

Conventional PMI, FHA mortgage insurance, and other forms of mortgage insurance can have different requirements. Comparing them requires looking at the specific loan program rather than applying one set of rules to every mortgage.

How PMI Fits Into the Overall Cost of a Mortgage

PMI is only one component of the overall cost of home financing. A complete comparison should consider the interest rate, loan amount, loan term, upfront costs, recurring mortgage insurance, property taxes, homeowners insurance, and other applicable expenses.

A mortgage with a lower interest rate is not necessarily less expensive in every situation if it includes higher upfront costs or different mortgage-insurance expenses. Likewise, choosing a larger down payment solely to avoid PMI may not be appropriate if doing so leaves insufficient funds for reserves and other financial obligations.

Borrowers should therefore evaluate the complete loan structure and expected ownership period instead of focusing on a single payment component.

Frequently Asked Questions About PMI

Is PMI required on every conventional mortgage?

No. PMI is commonly required when a conventional mortgage has a higher loan-to-value ratio, such as when the down payment is below 20%, but requirements depend on the specific mortgage and lender or investor guidelines.

Does PMI reduce my mortgage principal?

No. PMI is a mortgage-related insurance cost and generally does not reduce the principal balance of the loan.

Can I request PMI cancellation before 20% equity?

Federal cancellation rules generally focus on the mortgage balance reaching the applicable 80% of original value threshold. Some mortgage investors may provide additional cancellation options based on current value and other requirements.

Will PMI automatically disappear when my home increases in value?

Not necessarily. An increase in property value does not automatically terminate PMI under the standard federal automatic-termination rule. Some loans may permit borrower-requested cancellation based on current value if specific requirements are met.

Does FHA mortgage insurance follow the same cancellation rules as conventional PMI?

No. FHA mortgage insurance follows different requirements. Borrowers should review the specific FHA rules applicable to their loan rather than applying conventional PMI cancellation rules.

Where can I find my PMI cancellation information?

The mortgage's PMI disclosure and servicing documents generally contain important information about cancellation and termination. Borrowers can also contact their mortgage servicer for the current balance, applicable cancellation requirements, and scheduled termination information.

Conclusion

Private mortgage insurance is an important consideration for borrowers using certain conventional mortgage structures, particularly when the initial down payment is relatively small. PMI can increase the monthly cost of a mortgage, but it can also allow eligible borrowers to finance a home without making a 20% down payment.

The key to understanding PMI is recognizing its relationship with loan-to-value ratio and property value. As the mortgage principal declines, the borrower's equity generally increases. Under applicable rules, borrower-paid PMI may eventually be canceled or automatically terminated when specified conditions are met.

Borrowers should review the specific PMI provisions associated with their mortgage rather than relying on general assumptions. Loan type, payment history, original property value, current property value, mortgage balance, and investor or servicer requirements can all affect the cancellation process.

Understanding PMI before closing can also make it easier to compare mortgage options. A complete comparison should consider not only the interest rate and principal-and-interest payment, but also mortgage insurance, upfront costs, taxes, insurance, and the expected length of time the borrower will keep the loan.

For borrowers evaluating different conventional financing structures, Ultimate Mortgage's conventional mortgage information provides another resource for understanding the basic structure of this type of home financing.