Mortgage Insurance (PMI): How Private Mortgage Insurance Works and How to Remove It

How PMI Works

PMI is typically paid as part of your monthly mortgage payment and held in an escrow account managed by your lender. The lender pays the annual PMI premium to the insurance company from this escrow account. The cost depends on three factors: your credit score (higher scores get lower rates), your down payment (larger down payments mean lower PMI), and the loan type (conventional loans use PMI, while FHA loans use MIP — mortgage insurance premium — which works differently). For a borrower with a 780 credit score putting 10% down on a conventional loan, PMI might cost 0.3% of the loan amount annually. For a borrower with a 620 score putting 5% down, PMI could cost 1.5% or more annually. PMI is not permanent — federal law requires automatic termination when your loan-to-value ratio reaches 78% of the original property value, and you can request cancellation at 80% LTV. Improve your credit score to lower PMI costs →

PMI vs MIP (FHA Mortgage Insurance)

FHA loans have their own mortgage insurance called MIP (Mortgage Insurance Premium). The key differences: PMI on conventional loans can be canceled when you reach 78% LTV. MIP on FHA loans with less than 10% down lasts for the entire life of the loan — you cannot cancel it unless you refinance into a conventional loan. MIP also requires an upfront premium of 1.75% of the loan amount at closing, in addition to the annual premium of 0.55% to 1.05%. For a $360,000 loan, that means $6,300 upfront plus $1,980 to $3,780 per year in annual MIP. FHA loans are best for borrowers with lower credit scores or minimal down payments who cannot qualify for conventional financing. If you have good credit (over 680) and at least 5% down, conventional financing with PMI is almost always cheaper than FHA with MIP because PMI can be canceled and MIP cannot.

How to Remove PMI

Federal law provides two mechanisms for removing PMI from conventional loans. Automatic termination: your lender must automatically terminate PMI on the date your loan-to-value ratio reaches 78% of the original property value, assuming you are current on payments. This typically happens when your principal balance falls to 78% of the original purchase price or appraised value at the time of purchase. Borrower-requested cancellation: you can request PMI cancellation in writing when your LTV reaches 80%. Your lender may require a new appraisal (at your expense, typically $300 to $500) to confirm the current property value has not declined. If your home has appreciated significantly, you may reach 80% LTV much faster through appreciation than through principal payments alone. Final termination: PMI must be terminated no later than the midpoint of the loan's amortization schedule, regardless of LTV. For a 30-year loan, this is year 15. To remove PMI faster, make extra principal payments, improve your home's value through renovations, or refinance when you reach 20% equity. Compare refinancing options to remove PMI →

How to Avoid PMI Entirely

There are several strategies to avoid PMI without making a 20% down payment. The piggyback loan (80/10/10): take out a first mortgage for 80% of the home's value, put 10% down, and take out a second mortgage (home equity loan or HELOC) for the remaining 10%. The second mortgage typically has a higher interest rate but avoids PMI. The second mortgage interest may be tax-deductible. Lender-paid PMI (LPMI): the lender pays the PMI premium in exchange for a higher interest rate on your mortgage. This converts a monthly PMI payment into a higher rate over the life of the loan. LPMI can be beneficial if you plan to stay in the home long enough for the rate increase to be cheaper than paying PMI separately. Compare the total cost of each option over your expected time in the home. A zero-down-payment option: some lenders offer conventional loans with 0% down and no PMI through special programs for first-time buyers, veterans (VA loans), or rural buyers (USDA loans). VA and USDA loans have their own funding fees but no monthly mortgage insurance. Explore programs for first-time home buyers →

How is PMI calculated?

PMI is calculated as a percentage of your original loan amount, typically 0.3% to 1.5% annually. Multiply your loan amount by the PMI rate, then divide by 12 for the monthly cost. Example: $360,000 loan at 0.5% PMI = $1,800/year = $150/month. Factors that determine your rate: credit score (most important factor — a 760+ score gets the best rates), down payment percentage (5% down costs more than 15% down), loan type (fixed-rate vs adjustable-rate), and the property type (owner-occupied vs investment property, single-family vs condo). Your lender will provide a PMI disclosure at application showing the estimated monthly cost. You can use this to compare the total cost of different down payment scenarios.

Can I deduct PMI on my taxes?

PMI premiums have been deductible as mortgage insurance on Schedule A for qualified borrowers in some tax years, but the deduction has expired and been reinstated multiple times by Congress. As of the most recent tax law updates, PMI deduction availability depends on annual legislative action. The deduction phases out for higher-income borrowers (AGI over $100,000, or $50,000 if married filing separately). Even when available, you must itemize deductions to claim it. Given the standard deduction has nearly doubled since the Tax Cuts and Jobs Act, fewer homeowners itemize. Consult a tax professional for the current deductibility status in your specific tax year. The potential deduction is a nice bonus but should not be the deciding factor in whether to pay PMI or pursue an alternative like a piggyback loan.

Does PMI cover the borrower?

No, PMI protects the lender, not you. If you default on your mortgage and the lender forecloses, PMI reimburses the lender for the difference between the amount owed on the loan and the amount recovered through the foreclosure sale. It does not pay for your moving expenses, cover your lost down payment, or provide any direct benefit to you. The only benefit to the borrower is that PMI enables you to buy a home with a lower down payment than would otherwise be possible. Despite protecting only the lender, PMI serves an important function: it allows millions of Americans to become homeowners years earlier than if they had to save a full 20% down payment. For many borrowers, the cost of PMI is outweighed by the benefits of homeownership — building equity, price appreciation, and the stability of a fixed-rate mortgage.

What happens to PMI when I refinance?

When you refinance, your existing PMI policy terminates, and you will need to address PMI on the new loan. If your refinance results in a loan-to-value ratio of 80% or less based on a new appraisal, you will not need PMI on the new loan. This is one of the primary reasons homeowners refinance — to get a new appraisal that reflects appreciation and eliminates PMI. If the new LTV is above 80%, you will need PMI on the refinanced loan, though the rate may be different based on current PMI pricing and your credit profile. Refinancing from an FHA loan to a conventional loan is a common strategy to eliminate MIP, which (as noted above) cannot be canceled on FHA loans with less than 10% down. When comparing refinance costs, include the appraisal fee and closing costs in your breakeven analysis against the PMI savings.

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