If you are planning to buy a home with a smaller down payment on a conventional loan, you will likely hear about private mortgage insurance, or PMI. It adds to your monthly cost, but it can also make it possible to buy sooner. Understanding how it works, and how it can end, helps you plan.
What PMI is
PMI is insurance that protects the lender, not the borrower, if a borrower stops making payments on a conventional loan. Lenders commonly require it when the down payment is less than 20 percent of the home’s price or value. You pay the premium, but the coverage benefits the lender.
PMI is different from homeowners insurance, which protects your home and belongings. It is also different from the mortgage insurance on government-backed loans, such as FHA loans, which follow their own rules.
How PMI is paid
There are a few common ways to pay for PMI:
- Monthly: a premium added to your monthly mortgage payment. This is the most common approach.
- Upfront: a single premium paid at closing.
- Split: part paid at closing and the rest monthly.
- Lender-paid: the lender covers the insurance in exchange for a higher interest rate, which generally cannot be canceled the same way.
The cost depends on factors such as your credit, down payment and loan type. Your Loan Estimate will show what to expect.
How PMI can be removed
For most conventional loans on a primary residence, federal law, specifically the Homeowners Protection Act, provides ways for borrower-paid PMI to end:
- By request: you can generally ask your servicer to cancel PMI once your loan balance is scheduled to reach 80 percent of the home’s original value, or once you have paid it down to that point, if you meet requirements such as a good payment history.
- Automatically: PMI generally must end when your balance is scheduled to reach 78 percent of the original value, provided you are current on payments.
- At the loan’s midpoint: in certain cases, PMI must end at the midpoint of the loan term if you are current.
“Original value” usually means the lower of the purchase price or appraised value at the time you bought. Lenders may have additional requirements, such as an appraisal, so ask your servicer for the specifics. The Consumer Financial Protection Bureau explains these rules at ConsumerFinance.gov.
Is paying PMI worth it?
This is a personal decision. Some buyers prefer to wait until they have saved a larger down payment. Others decide that buying sooner, even with PMI, fits their goals better. There are tradeoffs either way, including how long it would take to save more and what happens to prices and rents in the meantime.
Ask your lender to show you scenarios with different down payments, including how long PMI is likely to last in each. For advice tailored to your finances, talk with a lender or financial advisor. When you are ready to start looking at homes, reach us through our contact page.
A Worked Example: Watching PMI Come Off
Seeing how PMI works over time can make it feel less mysterious. Imagine a buyer who purchases a home near Cartersville with a conventional loan and a down payment smaller than 20 percent. Her lender requires borrower-paid monthly PMI, which appears as a line item in her monthly payment.
At closing, she receives disclosures showing the date her loan balance is scheduled to reach 80 percent and 78 percent of the home’s original value, based on her regular payment schedule. She makes a note of both dates.
A few years later, she has made every payment on time and has also made some extra principal payments. Her balance reaches 80 percent of the original value earlier than scheduled. She contacts her servicer in writing to request cancellation. The servicer explains its requirements, which may include a review of her payment history and confirmation that the home’s value has not declined. Once the conditions are met, PMI is removed, and her monthly payment drops.
If she had not requested cancellation, PMI would generally have ended automatically when her balance was scheduled to reach 78 percent, as long as she was current on her payments.
Putting It Into Practice: Steps to Remove PMI
- Find your PMI disclosure. Look through your closing documents for the disclosure showing your cancellation and termination dates.
- Track your balance. Check your monthly statements or online account to see how close you are to 80 percent of the original value.
- Consider extra payments. If your loan allows it, extra principal payments can help you reach the threshold sooner. Make sure your servicer applies them to principal.
- Contact your servicer. Ask about their requirements for cancellation, including any appraisal or payment history rules.
- Submit a written request. Put your request in writing and keep a copy.
- Confirm the change. After approval, check your next statement to make sure PMI has been removed.
Common PMI Misunderstandings
- “PMI protects me.” It protects the lender. Homeowners insurance and other coverages are what protect you.
- “PMI lasts for the life of the loan.” On most conventional loans for primary residences, borrower-paid PMI can be canceled or ends automatically under federal rules.
- “Rising home values automatically remove PMI.” Increases in value do not automatically end PMI under the standard rules, which are based on original value. Some servicers may consider a new appraisal for cancellation, so ask about their policies.
- “FHA mortgage insurance works the same way.” FHA loans have their own mortgage insurance rules, which differ from PMI on conventional loans. Ask your lender how they apply to you.
- “I have to put 20 percent down to buy.” Many buyers purchase with less and pay PMI for a period. Whether that makes sense depends on your goals.
Questions Readers Ask
Can I refinance to get rid of PMI?
Refinancing may remove PMI if your new loan meets the lender’s equity requirements, but it comes with costs. Compare those costs with your remaining PMI payments.
Is PMI tax-deductible?
Tax rules on mortgage insurance have changed over time. A CPA can tell you what applies to your situation.
Does PMI cost the same for everyone?
No. Premiums depend on factors such as your credit, down payment, and loan details. Your Loan Estimate will show your expected cost.
For guidance on whether PMI fits your plans, talk with a lender or financial advisor.
