Private mortgage insurance (PMI) is what most homebuyers pay when they put less than 20% down on a conventional mortgage. It can add hundreds of dollars to a monthly payment and is one of the most disliked line items on a mortgage statement — mostly because it protects the lender, not the homeowner. The good news: PMI is removable on most loans, and the rules for getting rid of it are clearer than many homeowners realize.
What PMI is and why lenders require it
PMI is an insurance policy that protects the lender if you default on a conventional mortgage with less than 20% equity in the home. The lender requires it — you pay the premium — because borrowers with smaller down payments statistically default at higher rates. PMI doesn’t insure you, it doesn’t pay your mortgage if you can’t, and it offers no benefit to your finances. It exists purely to make low-down-payment lending less risky for banks.
PMI applies to conventional loans only. Different programs have their own versions:
- FHA loans use Mortgage Insurance Premium (MIP) — rules are stricter and MIP usually can’t be removed without refinancing
- VA loans don’t require ongoing mortgage insurance, but they have a one-time funding fee
- USDA loans require both an upfront and an annual guarantee fee
This article focuses on conventional PMI, where the rules favor homeowners more than most people think.
How much PMI costs
PMI typically runs 0.3% to 1.5% of the original loan amount per year, billed monthly. The exact rate depends on:
- Your credit score — lower scores mean higher PMI premiums
- Your down payment — 5% down costs more in PMI than 15% down
- Loan term — 30-year loans usually have higher PMI than 15-year loans
- Loan type — primary residences cost less than second homes or investment properties
On a $300,000 loan with average credit and 10% down, PMI typically costs $1,500–$3,000 a year — $125–$250 a month. Over the years it takes most homeowners to reach 20% equity, that adds up to $5,000–$15,000 in pure cost.
The four ways PMI ends
1. Automatic termination at 78% LTV
Federal law (the Homeowners Protection Act of 1998) requires the lender to automatically cancel PMI when your loan balance reaches 78% of the home’s original value, based on the original payment schedule. You don’t have to ask. You don’t need an appraisal. The lender just stops billing it. The catch: this is based on scheduled amortization, not actual extra payments you’ve made. Without extra principal payments, this typically takes 10–15 years on a 30-year loan.
2. Borrower-requested cancellation at 80% LTV
You can request PMI cancellation when your balance reaches 80% of the original home value (or sooner if you’ve built equity through extra payments). Requirements:
- Submit a written request to your servicer
- Be current on payments and have a good payment history
- Have no second mortgage or junior lien (in some cases)
- Possibly pay for a current appraisal at your expense (especially if requesting based on extra payments rather than scheduled amortization)
This is the most-overlooked option. Many homeowners reach 80% LTV and don’t realize they need to ask — the lender isn’t required to cancel until 78%.
3. Cancellation based on current value, not original
If your home has appreciated, you may have 20% equity even though your loan balance hasn’t dropped much. Servicers vary on their rules for this:
- 2 years of payments + 25% equity based on current value — the typical Fannie Mae rule
- 5 years of payments + 20% equity based on current value — alternative threshold
You’ll need an appraisal (paid by you) and a written request. In hot housing markets, this can shave years off your PMI obligation. Worth doing the math any time your area sees significant appreciation.
4. Refinance into a new loan without PMI
If your current home value gives you 20%+ equity, refinancing into a new conventional loan eliminates PMI immediately. This usually only makes sense when refinancing also makes sense on its own merits (lower rate, better term). Refinancing just to remove PMI almost always costs more in closing costs than the PMI you’d save.
How to calculate when you’ll hit 80% LTV
Look at your most recent mortgage statement. Find the original loan amount and the current balance. Then:
- Multiply the original home purchase price by 0.80 — that’s your target balance
- Subtract your current balance from that target — that’s how much principal you still need to pay down
- Check your amortization schedule (most servicers provide one) to see when scheduled payments will hit that number
Example: Home purchased for $400,000. 80% target balance = $320,000. Current balance: $340,000. You need to pay down $20,000 in principal. On a 30-year loan, that might be 2–3 years of scheduled payments — or much faster if you make extra principal payments.
Faster ways to drop PMI
Make extra principal payments
Even an extra $100–$200 a month directly toward principal can shave years off your time to 80% LTV. The earlier you do it, the more it saves — early in a loan, almost all of your regular payment goes to interest, so extra principal has outsized impact on the balance.
To make sure extra payments go to principal, mark them clearly (most servicers have a “principal-only” option in their online portal). Some servicers default extra payments to the next month’s payment instead of principal — you have to specify.
Recast the loan
A loan recast applies a lump-sum payment to your principal and re-amortizes the loan based on the new lower balance. It doesn’t lower your rate, but it lowers your monthly payment and accelerates equity. Recast fees are usually $250–$500. If you have a windfall (inheritance, bonus, sale of another asset), recasting can move you toward PMI removal faster than just keeping the cash in savings.
Get a fresh appraisal in an appreciating market
If home values in your area have risen significantly, an appraisal can establish that you’re at 20%+ equity even before you’ve paid down much principal. Appraisals cost $400–$700 — usually a worthwhile investment if it removes a $200/month PMI premium.
The PMI-on-FHA difference
FHA loans work differently and many homebuyers don’t realize this until years in:
- Loans originated after June 2013 with less than 10% down: MIP is required for the life of the loan — the only way to remove it is to refinance into a conventional loan
- Loans originated after June 2013 with 10% or more down: MIP can be removed after 11 years
- Older FHA loans: Different rules apply — check your loan documents
If you have an FHA loan and have built 20%+ equity, refinancing into a conventional loan eliminates the MIP entirely. Run the closing-cost math against the MIP savings to see if it’s worth doing.
Common mistakes
- Waiting for automatic cancellation when you could request it sooner. The 80% borrower-requested threshold comes before the 78% automatic threshold. Always know which one applies to your situation.
- Not knowing your servicer’s exact rules. Federal law sets the floor; servicer policies sometimes go further (or impose extra requirements). Read your loan documents or call.
- Refinancing primarily to remove PMI. Closing costs almost always exceed remaining PMI savings unless you’re also getting a lower rate.
- Skipping the appraisal in an appreciating market. A $500 appraisal that drops a $200/month premium pays for itself in three months.
- Confusing PMI with homeowners insurance. Homeowners insurance protects you and your property — it’s required and stays. PMI protects the lender and is removable.
- Not making extra principal payments early. The first few years of a mortgage are when extra principal does the most work.
How to request PMI cancellation
- Pull your current mortgage statement and identify the loan balance and original home value
- Calculate your loan-to-value ratio: (current balance ÷ original value) × 100
- If that’s 80% or below, write a formal request to your servicer (most have an online form or specific mailing address)
- If your home has appreciated significantly, request a current-value-based cancellation and arrange an appraisal
- Confirm in writing that PMI has been removed and verify your next billing statement reflects the lower payment
- If the servicer refuses or doesn’t respond within a reasonable timeframe, file a complaint with the Consumer Financial Protection Bureau (CFPB) — lender obligations under the Homeowners Protection Act are federal law
Bottom line
PMI is a real cost — often $100–$300 a month — but it’s temporary on conventional loans, and the rules for removing it are written in your favor. Most homeowners can drop PMI years earlier than they realize by requesting cancellation at 80% LTV, making extra principal payments, or getting a current appraisal in an appreciating market.
The single most useful action: pull your mortgage statement, calculate your current LTV, and find out exactly when you’ll hit the 80% threshold. From there, decide whether faster equity-building or a current-value appraisal might move that date sooner. PMI removal is one of the easiest wins in personal finance — once you know the rules.
Further Reading
- Mortgage Refinancing: When It Makes Sense
- Home Equity Options: HELOCs and Loans
- How to Save for a Down Payment on a House
- Homeowners Insurance Explained
- Renting vs. Buying a Home
- Lower Your Bills
This article is for general educational purposes only and does not constitute mortgage or financial advice. Rules vary by lender and loan type. Consult a licensed mortgage professional for guidance specific to your situation.