If you bought a home with less than 20% down, there’s a good chance you’re paying for private mortgage insurance every month — and it’s possible you don’t fully understand what it is or that you have rights to cancel it. Here’s everything you need to know.
What PMI is
PMI stands for Private Mortgage Insurance. It’s a monthly premium added to your mortgage payment when you put less than 20% down on a conventional loan. Despite the word “insurance” in the name, PMI protects the lender — not you. If you default on the loan, the PMI policy pays out to the lender to cover part of their loss. You pay for it, but you receive no direct benefit from it. It exists because lenders consider loans with less than 20% equity higher-risk, and PMI offsets that risk.
How much PMI costs
PMI typically costs 0.5–1.5% of the original loan amount per year, depending on your credit score, loan-to-value ratio, and lender. On a $300,000 loan, that’s $1,500–$4,500 per year, or $125–$375 added to your monthly payment. The lower your down payment and credit score, the higher your PMI rate. It’s a real cost — and one of the primary reasons financial advisors traditionally recommend saving for a 20% down payment before buying.
When PMI is automatically removed
Under the Homeowners Protection Act (a federal law), lenders must automatically cancel PMI when your loan balance reaches 78% of the original purchase price — provided you’re current on payments. This is called automatic termination. At 80% of the original value, you have the right to request cancellation in writing. Note: this is based on the original purchase price, not the current market value. If your home has appreciated significantly, your actual equity may already be well above 20%, but the automatic cancellation is still calculated from the original number.
How to remove PMI faster
- Make extra principal payments. Accelerating your payoff timeline gets you to the 80% threshold faster. Even $100–$200 extra per month adds up significantly over time.
- Request cancellation based on appreciation. If your home’s value has increased enough that you now have 20%+ equity based on current market value, you can request PMI cancellation. Your lender will typically require a formal appraisal (at your cost, usually $300–$600) to confirm the new value. If the appraisal supports it, they’re generally required to remove PMI.
- Refinance. If rates are favorable and your home has appreciated, refinancing into a new loan where you have 20%+ equity eliminates PMI. Factor in closing costs to determine whether the math makes sense.
- Reach the automatic termination date. If none of the above apply, PMI will cancel automatically once you reach 78% LTV based on your original amortization schedule — you don’t have to do anything.
FHA loans and MIP — an important distinction
FHA loans have their own version called MIP (Mortgage Insurance Premium), and the rules are different — and less favorable. FHA loans originated after June 2013 with less than 10% down require MIP for the entire life of the loan. The only way to remove FHA MIP is to refinance into a conventional loan once you’ve built sufficient equity. If you originally took an FHA loan, refinancing into a conventional loan when you hit 20% equity is often a smart financial move specifically to eliminate the ongoing MIP cost.
Is paying PMI ever worth it?
Sometimes yes. If home prices in your market are rising rapidly, waiting years to save a 20% down payment can cost more in appreciation than you’d pay in PMI. If you plan to build equity quickly through extra payments, you may only pay PMI for 3–5 years before eliminating it. The decision depends on your market, your timeline, and the specific PMI rate you’re quoted. PMI isn’t inherently bad — it’s a cost that enables homeownership with less upfront capital, and whether it’s worth paying depends entirely on your situation.