| Feature | Conventional PMI | FHA mortgage insurance |
|---|---|---|
| Triggered by | Down payment under 20 percent | Most FHA loans regardless of down payment |
| Typical annual cost | About 0.5 to 1.5 percent of loan | Upfront premium plus annual premium |
| Cancellation | At about 20 to 22 percent equity | Often lasts loan term unless refinanced |
| Who it protects | The lender | The lender |
Glossary · Financing & mortgages
Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, is a policy that protects the lender, not the borrower, if a borrower defaults. Lenders typically require it on conventional loans when the down payment is under 20 percent. PMI lets buyers purchase with less cash down, and on conventional loans it can usually be canceled once enough equity builds.
Also known as: PMI
How does PMI work?
PMI is usually paid as a monthly premium added to your mortgage payment, priced on your loan-to-value ratio and credit. The lower your down payment and credit score, the higher the premium. It covers the lender against loss, so a default still hurts the borrower.
The premium is commonly built into the monthly payment, though borrowers can sometimes pay a single upfront premium or accept a slightly higher rate instead.
Cost typically runs roughly 0.5 percent to 1.5 percent of the loan balance per year, varying with down payment size and credit profile. A stronger file means a smaller premium.
Why does PMI matter to buyers?
PMI raises your monthly payment, but it also lets you buy sooner with less than 20 percent down. For many buyers, paying PMI for a few years beats waiting years to save a full 20 percent while home prices and rents climb.
PMI trades a temporary monthly cost for earlier access to homeownership. Buyers weigh that premium against the risk of prices rising while they save a larger down payment.
Because PMI is cancelable on conventional loans, many borrowers treat it as a short-term cost they can shed as equity grows through payments and appreciation.
When can PMI be canceled?
On conventional loans, you can generally request PMI cancellation once you reach about 20 percent equity based on the original value. By federal law, the servicer must automatically end it at 22 percent equity on the original schedule, provided payments are current.
You can ask to cancel PMI early once the balance drops to 80 percent of the original value, and rising home values or extra payments can speed that up, sometimes with a new appraisal.
FHA loans work differently. FHA mortgage insurance often lasts much of the loan term unless you refinance, so it does not cancel the same way conventional PMI does.
Worked example. For example, a buyer purchases a 250,000 dollar home with 10 percent down, borrowing 225,000 dollars. At a PMI rate near 0.6 percent per year, the premium is about 1,350 dollars annually, or roughly 112 dollars added to the monthly payment. Once the balance falls to 200,000 dollars, which is 80 percent of the original value, the buyer can request cancellation.
Common mistakes with Private Mortgage Insurance
- Do not assume PMI protects you, because it reimburses the lender while you still lose your equity in a default.
- Do not confuse conventional PMI with FHA mortgage insurance, since FHA coverage often cannot be canceled without refinancing.
- Do not wait passively for PMI to drop off, because you can often request cancellation earlier once you reach 20 percent equity.
- Do not ignore your credit score when it comes to PMI pricing, since a higher score can meaningfully lower the premium.
- Do not overlook lender-paid PMI trade-offs, because a higher interest rate replaces the premium and can cost more over time.
Related terms
Term
Conventional Loan
A mortgage not insured or guaranteed by the government, often following Fannie Mae and Fre
Define TermFHA Loan
A government-insured mortgage with lower down payment and credit requirements, popular wit
Define TermPITI
The four components of a typical monthly mortgage payment: principal, interest, taxes, and
Define TermPre-Approval vs. Pre-Qualification
Two levels of lender assessment of how much a buyer can borrow, differing in depth and rel
DefinePrivate Mortgage Insurance FAQ
Is PMI tax deductible?
Deductibility of mortgage insurance premiums has changed repeatedly and depends on current tax law and your income. Do not count on it. Check with a tax professional or current IRS guidance before assuming you can deduct PMI.
How much does PMI cost each month?
PMI commonly runs about 0.5 percent to 1.5 percent of the loan balance per year, split into monthly payments. On a 200,000 dollar loan, that is roughly 80 to 250 dollars a month depending on your down payment and credit.
Can I avoid PMI without 20 percent down?
Some borrowers avoid monthly PMI using lender-paid PMI, a piggyback second loan, or VA financing, which needs no mortgage insurance. Each option has trade-offs, so compare the total cost rather than just the monthly payment.
Does PMI go away automatically?
On conventional loans, federal law requires the servicer to cancel PMI automatically once you reach 22 percent equity on the original amortization schedule and your payments are current. You can also request removal earlier at 20 percent equity.
Does refinancing remove PMI?
Refinancing can remove PMI if your new loan-to-value ratio is at or below 80 percent, often thanks to a higher home value or a larger balance paydown. Weigh the refinance closing costs against the premium savings first.
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