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PMI

Loan & Credit

Private Mortgage Insurance

Insurance that protects a mortgage lender (not the borrower) against loss if the borrower defaults, typically required on conventional loans when the down payment is below 20%.

Definition

Private Mortgage Insurance (PMI) is insurance required by lenders on conventional home loans when the borrower's down payment is less than 20% of the home's purchase price. It protects the lender — not the homeowner — against financial loss if the borrower defaults on the mortgage.

PMI is typically added to your monthly mortgage payment and continues until you build enough equity in the home, usually by paying down the loan balance or through home price appreciation, to reach a loan-to-value ratio of 80% or lower.

Formula

Annual PMI Cost = Loan Amount × PMI Rate (typically 0.5%–1.5%)

Monthly PMI Payment = Annual PMI Cost / 12

The exact PMI rate is set by the mortgage insurer based on your credit score, down payment size, and LTV ratio.

Worked Example

You buy a $350,000 home with a 10% down payment ($35,000), leaving a loan amount of $315,000 and an LTV of 90%. Your lender quotes a PMI rate of 0.8% annually.

Annual PMI = $315,000 × 0.8% = $2,520

Monthly PMI = $2,520 / 12 = $210

This $210 is added on top of your principal and interest payment each month until your LTV drops to 80% (loan balance of $280,000) or below. Use the PMI calculator to estimate your own PMI cost and see how it changes as your equity grows.

Key Things to Know

  • PMI ends automatically at 78% LTV: Federal law requires automatic cancellation at 78% of the original home value on schedule, even if you don't request it — but you can request removal at 80% LTV.
  • A larger down payment avoids PMI entirely: Putting down 20% or more keeps your LTV at 80% or below from day one, eliminating PMI altogether.
  • Higher LTV means higher PMI rates: A 95% LTV loan carries a noticeably higher PMI rate than a 85% LTV loan, since the lender's risk scales with how little equity you've put in.
  • Home appreciation can speed up PMI removal: If your home's market value rises faster than expected, you may reach 80% LTV sooner than your amortization schedule suggests — request a new appraisal to confirm.
  • PMI differs from FHA mortgage insurance (MIP): FHA loans use a separate mortgage insurance premium structure that often cannot be cancelled without refinancing into a conventional loan.

Related Calculators

PMI Calculator →Calculate your monthly and annual Private Mortgage Insurance cost, plus the total PMI you'll pay until your LTV reaches 78% and PMI is removed, free.

Related Terms

Down PaymentDown PaymentLTVLoan-to-Value RatioMortgageHome Loan Product (US / Global)

Frequently Asked Questions

Under the US Homeowners Protection Act, lenders must automatically cancel PMI once your loan balance reaches 78% of the home's original value, based on the original amortization schedule. You can also request cancellation earlier, once you reach 80% LTV, by demonstrating you have enough equity, sometimes requiring a new appraisal.
PMI usually costs between 0.5% and 1.5% of the original loan amount per year, split into monthly payments added to your mortgage bill. The exact rate depends on your credit score, down payment size, and loan-to-value ratio — lower credit scores and higher LTV both push the rate up.
No. PMI applies to conventional loans, while FHA loans require a similar but separate charge called the Mortgage Insurance Premium (MIP), which often cannot be cancelled for the life of the loan unless you refinance. PMI on conventional loans is generally easier and cheaper to remove over time.
Yes — the most common way is to put down at least 20% of the home's purchase price, which keeps your LTV at or below 80% and avoids PMI altogether. Some lenders also offer 'lender-paid PMI' (a slightly higher interest rate instead of a separate PMI charge) or piggyback second-mortgage structures to avoid it.
No. PMI protects the lender against loss if you default on the loan — it provides no protection or benefit to you as the borrower. This is a key distinction from other insurance types like homeowners insurance, which does protect the buyer's asset.