If you bought your home with less than 20 per cent down, there is a good chance a line called private mortgage insurance, or PMI, is hiding in your monthly mortgage payment. It is one of the most resented costs in home ownership, mainly because it protects your lender rather than you. The good news is that PMI is not meant to last forever. This guide explains what PMI is, what it costs, and the five main ways to get rid of it for good.
What Is Private Mortgage Insurance?
PMI is an insurance policy your lender arranges with a private insurer when you take out a conventional loan with a loan-to-value ratio above 80 per cent — in plain terms, when your down payment is under 20 per cent of the home’s price. If you stop paying and the lender forecloses, PMI covers part of the lender’s loss. Because it reduces the lender’s risk, lenders are willing to approve buyers with smaller down payments. You pay the premium, usually as an amount added to your monthly mortgage payment, although some loans structure it as an upfront fee or a slightly higher interest rate instead.
How Much Does PMI Cost?
PMI typically costs between 0.2 and 2 per cent of the loan amount per year, divided into monthly payments. On a $350,000 mortgage at 0.7 per cent, that is roughly $204 a month — real money that builds no equity. Your actual rate depends mostly on your credit score and down payment. A borrower with a 780 score and 15 per cent down might pay around 0.2 to 0.4 per cent a year, while a borrower with a 640 score and 3 per cent down could pay five times as much. Fixed-rate loans are generally cheaper to insure than adjustable-rate ones, and a larger down payment almost always lowers the rate.
When Is PMI Required — and When Is It Not?
PMI applies to conventional loans with less than 20 per cent down. Other loan types use different systems: FHA loans charge a Mortgage Insurance Premium (MIP) instead, VA loans charge a one-time funding fee, and USDA loans charge a guarantee fee. A few lenders offer lender-paid mortgage insurance in exchange for a higher interest rate, and some buyers use a piggyback loan — a second loan covering part of the down payment — to avoid PMI entirely. Each alternative has its own costs, so compare the total, not just whether PMI appears on the statement.
How to Get Rid of PMI
1. Reach 80 per cent loan-to-value and ask. Under the federal Homeowners Protection Act, once your balance falls to 80 per cent of the home’s original value through your normal payment schedule, you can ask your servicer in writing to cancel PMI. You must be current on payments and meet the servicer’s conditions. This is the most commonly used exit.
2. Wait for automatic termination at 78 per cent. If you do nothing, your servicer must automatically end PMI when the balance is scheduled to reach 78 per cent of the original value, provided you are current. Automatic is reassuring but slower than asking at 80 per cent, so mark the date and request cancellation yourself.
3. Pay the balance down early. Extra payments, a lump sum or a tax refund applied to principal can pull the 80 per cent date forward by years. Tell your servicer the extra money goes to principal, then request cancellation once you cross the threshold.
4. Use a higher home value. If your home has risen in value through the market or improvements, many servicers will cancel PMI based on a new appraisal you pay for, often costing $300 to $600. Rules vary: servicers commonly require the loan to be at least two years old and the new loan-to-value to be 75 to 80 per cent, so ask for their exact policy in writing.
5. Refinance. If you now have at least 20 per cent equity, refinancing into a new conventional loan removes PMI entirely. This only makes sense when the new rate and closing costs still leave you better off.
PMI vs MIP: Know Which One You Have
The cancellation rights above apply to PMI on conventional loans. FHA’s MIP follows different rules: for most recent FHA loans with less than 10 per cent down, MIP lasts for the life of the loan, and the only way out is to refinance into a conventional loan. Check your closing documents or ask your servicer which insurance you are paying before planning your exit.
Should You Avoid PMI at All Costs?
Not necessarily. Waiting years to save a full 20 per cent down payment while prices climb can cost more than a couple of years of PMI, and PMI lets you start building equity sooner. The smart approach is to treat PMI as a temporary toll: buy when the home and the payment fit your budget, know your cancellation date, and work a plan to remove it as early as possible.
Conclusion
PMI is the price of buying a home with a small down payment on a conventional loan, but it should never be a permanent one. Track your loan-to-value ratio, request cancellation at 80 per cent, use extra payments or a new appraisal to speed things up, and consider refinancing when the numbers work. Every month without PMI puts that money back where it belongs — in your pocket or your equity.