Glossary
Private Mortgage Insurance
Private mortgage insurance protects the lender, not you, when the down payment is under 20%: it costs roughly 0.3% to 1.5% of the loan a year. It cancels at 78% loan-to-value automatically, and sooner if you ask.
What it is
Private mortgage insurance, PMI, is an insurance policy the borrower pays for and the lender collects on. It reimburses the lender if the borrower defaults with less than 20% equity in the home. It applies to conventional loans with down payments under 20%, and it costs roughly 0.3% to 1.5% of the loan balance per year. That is typically $150 to $350 a month on a median-priced loan. The payment is folded into the monthly bill and buys the borrower nothing except access to the loan itself.
FHA loans carry a cousin, the mortgage insurance premium, MIP, which has an upfront component and an annual one that can last the life of the loan. Conventional PMI cancels: the Homeowners Protection Act requires automatic termination at 78% of the original home value and allows a written request at 80%. The difference between the two is the difference between an insurance that ends and one that does not.
Key takeaways
- PMI protects the lender against default when the down payment is under 20%.
- It costs roughly 0.3% to 1.5% of the loan balance per year.
- Conventional PMI cancels automatically at 78% loan-to-value, and by written request at 80%.
- FHA mortgage insurance premiums can last the life of the loan, unlike PMI.
- An appraisal after improvements can cancel PMI early if the loan-to-value has fallen.
How it works
The pricing is a percentage of the balance, set by the loan-to-value ratio and the credit score. A borrower putting 10% down on a $400,000 home borrows $360,000 and pays PMI of roughly 0.5% to 0.8% a year at a 740 credit score: $150 to $240 a month. The same loan at a 660 score prices closer to 1.2%, about $360 a month, which is how the insurance compounds the credit tier's mortgage pricing.
The cancellation is the machinery most borrowers never operate. Under the Homeowners Protection Act, servicers must automatically terminate PMI at 78% of the original value, scheduled on the amortization table, and must honor a written cancellation request at 80% with a clean payment history. An appraisal showing the home's value has risen enough to bring the loan-to-value under 80% can cancel the insurance years ahead of schedule, which is the lever Brent never pulled.
The FHA version behaves differently. The upfront premium is 1.75% of the loan, financed at closing, and the annual premium runs 0.15% to 0.75% depending on the loan-to-value and term; for loans originated above 90% loan-to-value, the annual premium lasts the life of the loan. The escape is refinancing to a conventional loan once 20% equity exists, which is the standard exit from the FHA version.
Why it matters
PMI is the price of buying with less than 20% down, and the price is worth paying when the alternative is years of rent while home prices rise. The mistake is not paying PMI; the mistakes are paying it longer than required and treating 20% down as a law. The insurance is removable, and the machinery is in the statute.
I watched a colleague named Brent (yes, that Brent) pay PMI for nine years on a home that had appreciated 40% in the first four. Nobody told him the written request at 80% loan-to-value existed, and the servicer's automatic termination was keyed to the original amortization schedule, not the appreciated value. The nine years of PMI totaled roughly $19,000, and the appraisal that would have ended it cost $500.
The highest-leverage thing most Americans can do is request PMI cancellation at 80% loan-to-value in writing and order the appraisal when appreciation has done the work. Check the loan-to-value with the LTV calculator, weigh the down payment decision with the house affordability calculator, and read the amortization that drives the automatic termination in the mortgage amortization entry.
Real-world examples
The 10% down loan
A borrower puts 10% down on a $400,000 home: a $360,000 loan at a 740 credit score prices PMI at roughly 0.6%, or $180 a month. The PMI buys access to the loan, not coverage for the borrower, and the bill is the borrower's. At the amortization schedule's pace, 20% equity arrives around year 13 on a 30-year loan, and the written request at 80% loan-to-value can end it sooner as payments build equity faster than the schedule assumes. The insurance is the lender's, and the bill is the borrower's.
The nine-year sit
Brent's home appreciated 40% in four years while his 30-year amortization inched the balance down. The loan-to-value fell from 90% toward 64%, and the PMI kept billing $165 a month for nine years because nobody filed the written request or the appraisal. The total was roughly $19,000 of insurance the statute would have ended for a $500 appraisal fee. The cancellation machinery is the borrower's to operate, and nobody operates it by default.
The FHA exit
An FHA borrower finances 3.5% down on $400,000, pays the 1.75% upfront premium, and an annual premium near 0.55% that lasts the life of the loan at that loan-to-value. Five years later, appreciation and paydown put equity at 22%, and the exit is a conventional refinance without mortgage insurance. The refinance costs closing costs of 2% to 3%; the lifetime premium on a $386,000 loan runs well past $25,000, which is the arithmetic of the escape.
Common mistakes
Mistake: Never requesting cancellation.
Why it bites you: Automatic termination keys to the original schedule, so appreciation does nothing until the borrower asks. Brent's nine years of PMI totaled roughly $19,000, and the appraisal cost $500.
Mistake: Assuming FHA mortgage insurance cancels.
Why it bites you: FHA annual premiums last the life of the loan when originated above 90% loan-to-value. The escape is a conventional refinance, not a letter to the servicer.
Mistake: Waiting years to save 20% down.
Why it bites you: Rent while prices rise can cost more than the PMI would have, and the entry price moves away. The 20% target is a convention, not a law.
Mistake: Ignoring the credit score's effect on PMI pricing.
Why it bites you: The same loan prices at 0.6% at a 740 score and 1.2% at a 660. The credit tier doubles the insurance bill, which is part of the mortgage pricing it compounds.
Ivy's take
I spent an evening inside the Homeowners Protection Act and two servicer cancellation policies so you do not have to. The finding is that PMI cancellation is a borrower-operated machine: the automatic termination keys to the original schedule, the written request at 80% is on the borrower, and the appraisal is the lever that ends it early. I ran the loan-to-value arithmetic across three appreciation paths. The nine-year sit was the default outcome for anyone who did nothing.
Brent did nothing for nine years, which is the default outcome for everyone. The statute ends the insurance only if the paperwork moves, and the paperwork is a one-page letter plus an appraisal. PMI is worth paying and not worth keeping, and the difference is entirely operational.
Related jargon, defined
- Loan-to-value ratio
- Loan balance divided by home value; the gauge PMI prices and cancels against.
- MIP
- FHA's mortgage insurance premium: upfront plus annual, sometimes for the loan's life.
- Homeowners Protection Act
- The federal law requiring automatic PMI termination at 78% and honoring requests at 80%.
- Down payment
- The cash equity at purchase; under 20% triggers PMI on conventional loans.
- Appraisal
- The professional valuation that can prove loan-to-value has fallen and cancel PMI early.
- Escrow
- The account collecting taxes and insurance inside the monthly payment.
Frequently asked questions
How much is private mortgage insurance?+
Roughly 0.3% to 1.5% of the loan balance per year, typically $150 to $350 a month on a median-priced loan. The rate depends on the loan-to-value ratio and the credit score.
When can I cancel PMI?+
By written request at 80% loan-to-value with a clean payment history, and the servicer must terminate it automatically at 78% of the original value. An appraisal showing appreciation can cancel it years earlier.
Does PMI protect me?+
No: it reimburses the lender if you default. Your protection is the equity you build, which is why the cancellation machinery matters more than the coverage.
Is FHA mortgage insurance the same as PMI?+
No: FHA's mortgage insurance premium has an upfront component of 1.75% and an annual premium that can last the life of the loan. Conventional PMI cancels at 78% loan-to-value by statute.
Should I save 20% down or pay PMI?+
Run the arithmetic: rent during the saving years and the entry price rising can cost more than the PMI. Paying PMI and cancelling or refinancing later is often the cheaper path, and the appreciation decides it.
Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.
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Ivy Sinclair-Wren
Financial Chaos Analyst
Ivy Sinclair-Wren is a Financial Chaos Analyst covering investing, AI, wealth psychology, and the emotional consequences of opening finance apps during market crashes. Based in Melbourne, she specializes in demystifying the US tax code and helping users navigate the intersection of spreadsheet logic and human irrationality.