What Is Private Mortgage Insurance (PMI) and How to Get Rid of It?
✦ Key takeaways
- PMI protects the lender, not you, and is usually required when your down payment is below 20%.
- Typical cost is 0.5%–1.5% of the loan amount per year.
- It cancels automatically at 78% loan-to-value under the U.S. Homeowners Protection Act.
- You can request removal at 80% LTV, or use refinancing or a new appraisal.
When you buy a home with a mortgage and put down less than 20% of the price, most lenders require Private Mortgage Insurance (PMI). The logic is simple: the smaller your down payment, the more the lender risks if you default. PMI is a policy that protects the lender (not you) against that loss — but you pay the premium.
The fee is added to your monthly payment and calculated as an annual percentage of the loan balance. Typical rates run from 0.5% to 1.5% per year depending on your credit score, down-payment size and loan type. On a $200,000 loan at 1% a year, that's about $2,000 annually, or roughly $167 a month on top of your payment.
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It's worth understanding that PMI isn't a scam — it's what allows banks to accept small down payments in the first place, opening homeownership to people who can't save a full 20%. But it's a temporary cost you should shed as fast as you can.
Types of PMI
Not all PMI is paid the same way. Here are the common forms:
| Type | How it's paid | Note |
|---|---|---|
| BPMI (monthly) | Added to your monthly payment | Most common and easiest to cancel |
| Single-Premium | One upfront payment at closing | Lowers the monthly cost but is non-refundable |
| Lender-Paid (LPMI) | Lender pays it for a higher rate | Can't be cancelled — baked into the rate |
| Split-Premium | Part upfront, part monthly | A middle-ground option |
Four ways to get rid of it
1) Automatic cancellation: Under the U.S. Homeowners Protection Act of 1998, the lender must automatically cancel BPMI once your loan balance reaches 78% of the home's original value, as long as you're current on payments.
2) Requesting removal at 80%: You can send a written request to cancel PMI as soon as your balance hits 80% of the original value — without waiting for 78%. That saves you months of fees.
3) A new appraisal: If your home has gained value (through the market or improvements you made), a formal appraisal may push your ratio to 80% sooner, letting you request removal based on the new value.
4) Refinancing: If your loan-to-value is now below 80%, you can refinance into a new loan without PMI — but weigh the closing costs before you decide.
A quick numeric example
You buy a home for $250,000 with a 10% down payment ($25,000). Your loan balance is $225,000 = 90% of value. At 0.8% PMI a year you'd pay about $1,800/year (~$150/month). Once you pay down to a $200,000 balance (80%), you can request cancellation and keep that full $150 a month.
Bottom line: PMI is a tool that lets you enter the housing market with a smaller down payment, but it isn't permanent. Track your loan-to-value ratio and request cancellation the moment you hit 80% so you don't pay a dollar more than you have to.