What Is PMI and Why Do Lenders Require It?
Private mortgage insurance (PMI) is a policy that protects your lender — not you — if you stop making payments on a conventional loan. Lenders typically require PMI whenever your down payment is less than 20% of the home’s purchase price, because a smaller down payment means a higher loan-to-value (LTV) ratio and more risk that the lender won’t fully recover its money in a foreclosure. PMI doesn’t protect you as the borrower at all — it’s purely a cost of borrowing with less than 20% down. Estimate your own PMI cost with the PMI Calculator.
How Much Does PMI Cost?
PMI is priced as a percentage of your original loan amount, charged annually and collected in monthly installments. Rates typically range from about 0.3% to 1.5% per year, depending on:
- Your credit score — higher scores generally mean lower PMI rates
- Your loan-to-value ratio — a smaller down payment (higher LTV) means a higher PMI rate
- Your loan term and loan type
- Whether you choose monthly, single-premium, or lender-paid PMI
On a $300,000 loan, a 0.5% PMI rate works out to $1,500 a year, or $125 a month. A borrower with a lower credit score and a smaller down payment might see a rate closer to 1.2-1.5%, or $300-$375 a month on the same loan amount. This is one of the main reasons a larger down payment can meaningfully lower your total housing cost — see our down payment guide for a full cost comparison across down payment sizes.
PMI Cost by Credit Score and Down Payment
PMI rates aren't one-size-fits-all — mortgage insurers price the premium using a rate card that weighs your credit score against your loan-to-value ratio. The table below shows illustrative annual PMI rates on a $300,000 conventional loan; actual quotes vary by insurer and can also depend on loan type (fixed vs. ARM) and property type.
| Credit Score | 97% LTV (3% down) | 90% LTV (10% down) | 85% LTV (15% down) |
|---|---|---|---|
| 760+ | ~0.5% ($125/mo) | ~0.3% ($75/mo) | ~0.2% ($50/mo) |
| 700-759 | ~0.7% ($175/mo) | ~0.5% ($125/mo) | ~0.35% ($88/mo) |
| 660-699 | ~1.1% ($275/mo) | ~0.8% ($200/mo) | ~0.6% ($150/mo) |
| 620-659 | ~1.5% ($375/mo) | ~1.2% ($300/mo) | ~0.9% ($225/mo) |
The pattern is consistent: a higher credit score and a larger down payment both push your PMI rate down, and the two effects stack. A borrower who raises their score from the 620-659 tier to 760+ before applying could cut their PMI payment by more than half on the same loan amount — often saving more in a single year than the cost of paying down a few credit card balances to get there. Use the PMI Calculator to model your specific rate range.
Three Ways PMI Can Be Structured
Most borrowers only encounter the standard monthly version of PMI, but there are actually three common structures, each with different cash-flow and cancellation trade-offs:
- Borrower-paid monthly PMI (BPMI): The default structure. A monthly premium is added to your mortgage payment and can be canceled once you reach the LTV thresholds described below. No upfront cash is required beyond the first month's premium.
- Single-premium (upfront) PMI: Instead of a monthly charge, you pay the entire PMI premium in one lump sum at closing — often 1.5-2.5% of the loan amount. This lowers your monthly payment (since there's no ongoing premium) but ties up more cash upfront, and if you sell or refinance shortly after closing, you typically don't get a meaningful refund of the unused portion.
- Split-premium PMI: A hybrid — you pay a smaller upfront amount at closing in exchange for a lower ongoing monthly premium than standard BPMI. This can make sense if you have some extra cash at closing but want to keep the monthly payment as low as possible.
Choosing between these structures usually comes down to how much cash you have available at closing versus how long you expect to keep the loan. If you plan to refinance or sell within a few years, monthly BPMI is usually the safer choice since you simply stop paying it when the loan is gone. If you're confident you'll hold the loan for many years and have the cash available, single-premium or split-premium PMI can reduce your total cost over time.
When PMI Automatically Cancels
The federal Homeowners Protection Act (HPA) of 1998 sets clear rules for when PMI must end on most conventional loans:
| LTV Threshold | What Happens |
|---|---|
| 80% LTV | You can submit a written request to cancel PMI. The lender may require you to be current on payments and, in some cases, order a new appraisal. |
| 78% LTV | PMI must be automatically terminated by the lender, as long as you're current on payments — no request required. |
These thresholds are based on your loan’s original value and amortization schedule, meaning the 78% and 80% marks are calculated against your original purchase price or appraised value, not necessarily your home’s current market value — unless you specifically request an appraisal-based early cancellation due to appreciation.
How to Request Early PMI Removal
- Track your loan balance against your original home value using an amortization schedule.
- Once you're close to 80% LTV, contact your servicer in writing to request cancellation.
- Confirm you have a good payment history — most servicers require no late payments in the past 12 months.
- Be prepared to pay for a new appraisal if you're requesting removal early due to home value appreciation rather than amortization alone.
Borrower-Paid vs. Lender-Paid PMI
Most PMI is borrower-paid (BPMI) — a separate monthly line item added to your mortgage payment that can be canceled once you reach the LTV thresholds above. Some lenders instead offer lender-paid PMI (LPMI), where the cost of the insurance is built into a slightly higher interest rate instead of billed separately. LPMI can lower your monthly payment compared to BPMI, but because it isn’t a distinct fee, it can’t be canceled the way BPMI can — the only way to remove it is typically to refinance into a new loan once you have enough equity.
PMI vs. FHA’s Mortgage Insurance Premium (MIP)
It’s important not to confuse PMI with MIP, the mortgage insurance premium charged on FHA loans. They serve a similar purpose but follow very different rules:
- PMI applies to conventional loans and can be automatically or manually canceled once you reach 78-80% LTV.
- MIP applies to FHA loans and includes both an upfront premium at closing and an annual premium paid monthly. On FHA loans with less than 10% down, MIP typically lasts for the entire life of the loan and does not automatically cancel — the most common way to remove it is refinancing into a conventional mortgage once you have sufficient equity.
This is a major long-term cost difference between loan types that many first-time buyers overlook when comparing an FHA loan to a conventional loan with PMI. Compare your full monthly payment, including insurance, using the Mortgage Calculator.
MIP in Detail: Upfront Plus Annual
Unlike PMI, which is charged only as an ongoing monthly premium, FHA MIP is actually two separate charges. The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount, due at closing but usually financed into the loan balance rather than paid in cash. The annual MIP is then charged monthly, typically ranging from about 0.15% to 0.75% of the loan amount per year depending on your loan term, loan amount, and LTV ratio. On top of the monthly cost, this means FHA borrowers effectively pay for mortgage insurance twice — once upfront and once annually — which is worth factoring into any FHA-versus-conventional comparison.
When MIP Lasts 11 Years vs. the Life of the Loan
The duration of annual MIP depends on your down payment at closing. If you put down 10% or more, MIP is scheduled to cancel after 11 years. If you put down less than 10% — which describes the majority of FHA borrowers, since FHA loans are popular partly because they allow as little as 3.5% down — MIP continues for the entire loan term, regardless of how much equity you eventually build through payments or appreciation. In that scenario, refinancing into a conventional loan is typically the only way to eliminate mortgage insurance once you have enough equity to avoid PMI on the new loan.
Strategies to Avoid or Minimize PMI
Putting 20% down at closing is the simplest way to avoid PMI entirely, but it isn’t the only option — and it isn’t always the best use of your cash. A few alternative strategies:
80/10/10 Piggyback Loans
In an 80/10/10 structure, you take out a first mortgage for 80% of the home’s value (avoiding PMI since it’s at or below 80% LTV), a second mortgage (often a home equity loan or HELOC) for 10%, and you put down the remaining 10% in cash. This avoids PMI entirely, but the second loan usually carries a higher interest rate than the first mortgage, and you're managing two payments instead of one. Whether this beats paying PMI depends on the combined cost of both loans versus the PMI premium you'd otherwise pay — run the numbers on both scenarios rather than assuming either is automatically cheaper.
Lender-Paid PMI Trade-Offs
As covered above, lender-paid PMI folds the insurance cost into a higher interest rate instead of a separate monthly line item. This can lower your total monthly payment compared to BPMI in some cases, since mortgage interest may be tax-deductible in ways PMI premiums may not be, and it simplifies your payment to a single number. The downside is permanence: because LPMI isn't a distinct fee, it rides along with your interest rate for the life of the loan unless you refinance, even after you've built well over 20% equity. Run both scenarios — BPMI with cancellation vs. LPMI's permanently higher rate — over your expected time in the home before choosing.
Other Ways to Avoid PMI
- VA loans: Eligible veterans and service members can borrow with 0% down and no PMI or MIP at all, though a one-time funding fee applies in most cases.
- Physician and professional loans: Some lenders offer specialty loan programs for certain professions that waive PMI even with less than 20% down, though these often come with other trade-offs like higher rates or stricter qualification.
- Making a larger down payment over time: If you're close to 20% but not quite there, it may be worth delaying your purchase briefly to save the difference, since avoiding PMI entirely is often cheaper than paying and later canceling it.
Model different down payment scenarios with the Down Payment Calculator to see exactly how much PMI you’d avoid at each level, and compare the full monthly cost of each strategy with the Mortgage Calculator.