PMI Explained: Cost of Private Mortgage Insurance and How to Cancel It

If you buy a home with less than 20% down on a conventional loan, your lender will almost certainly require private mortgage insurance, or PMI. It's an extra line on your monthly bill that buys you nothing directly — it protects the lender if you default. Understandably, that makes a lot of buyers resentful of it.

But PMI is also the trade that lets millions of people buy years earlier than they otherwise could, without waiting to save a full 20%. The smart move isn't to avoid PMI at all costs — it's to understand exactly what it costs, then cancel it as soon as you legally can. This guide covers both: what you'll pay, and the precise steps to make it go away.

What PMI is and why lenders require it

When you put less than 20% down, your loan-to-value ratio (LTV) is above 80% — you've borrowed more than 80% of the home's value. Statistically, higher-LTV loans default more often, so lenders offload that risk by requiring you to pay for an insurance policy that covers their loss if you stop paying.

PMI applies to conventional loans. It's a separate concept from FHA mortgage insurance (MIP), which has its own rules and is much harder to cancel — if you're weighing the two, FHA vs conventional breaks down the difference. VA loans don't have monthly mortgage insurance at all, one of their biggest perks (VA loans explained).

What PMI actually costs

PMI typically runs 0.3% to 1.5% of the loan amount per year, billed monthly. Where you land in that range depends mostly on two things: your credit score and your down payment size. Better credit and a larger down payment mean a lower rate.

Here's a worked example. Take a $380,000 loan (a $400,000 home with 5% down) and a mid-range PMI rate of 0.6% per year:

• Annual PMI: $380,000 × 0.6% = $2,280
• Monthly PMI: $2,280 ÷ 12 = $190/month

That $190 rides on top of your principal, interest, taxes, and insurance every month until you cancel it. Over, say, four years before you cancel, that's roughly $9,000 total — real money, but often far less than what you'd lose waiting years to save a bigger down payment while home prices and rents climb.

Your credit score swings this number a lot. The same loan might carry PMI near 0.3% (about $95/month) with excellent credit, or push past 1% (over $315/month) with a lower score. When you compare lenders, ask each for their specific PMI quote — it varies by insurer. You can see how PMI changes your total payment instantly by toggling it in the mortgage calculator.

The four flavors of PMI

Most buyers get borrower-paid monthly PMI, but you may be offered alternatives:

• Borrower-paid monthly (BPMI): the standard. Added to your monthly payment, and cancelable once you build equity. This is usually the best choice precisely because you can get rid of it.
• Single-premium PMI: you pay it all upfront in a lump sum at closing. Lowers your monthly payment, but you don't get it back if you sell or refinance early.
• Lender-paid PMI (LPMI): the lender "pays" the PMI in exchange for a higher interest rate. It looks like no PMI, but it's baked into your rate permanently — and unlike BPMI, it never cancels. Often a worse long-run deal.
• Split-premium: a partial upfront payment plus a smaller monthly amount.

For most people, stick with standard monthly BPMI. The whole strategy below depends on your ability to cancel it.

A quick word on lender-paid PMI, because it's the one that trips people up. A loan officer might pitch "no PMI" with LPMI, and on the surface a higher rate with no separate insurance line can even look like a lower total monthly payment than BPMI. The catch is permanence: with BPMI you'll drop that cost in a few years, but the higher LPMI rate sticks for the entire life of the loan (or until you refinance and pay closing costs all over again). Over a 30-year term, a permanently higher rate usually costs far more than a few years of cancelable PMI. Always compare the lifetime numbers, not just month one.

How to cancel PMI — the three paths

This is the part that saves you the most money. There are three ways PMI ends on a conventional loan, governed largely by the federal Homeowners Protection Act (HPA).

1. Automatic termination at 78% LTV

By law, your servicer must automatically cancel PMI once your loan balance reaches 78% of the home's original value — based on your original amortization schedule — as long as you're current on payments. You don't have to do anything, but you also don't have to wait for it.

2. Request cancellation at 80% LTV

You can request PMI cancellation once you reach 80% LTV (20% equity) based on the original value. This is the path to be proactive about, because it comes sooner than the 78% automatic point. To qualify you generally need:

• A written request to your servicer
• A good payment history (no recent late payments)
• No second mortgages or liens
• Possibly a current appraisal, at your cost, to confirm the value hasn't dropped

3. Equity from appreciation or improvements

Here's the path many homeowners miss. If your home's value has risen — through a hot market or renovations — you may hit 20% equity faster than your loan balance alone would suggest. Servicers have rules for using a new appraisal (often allowing cancellation at 75% or 80% of current value, depending on how long you've held the loan). If prices in your area have jumped, an appraisal might get you out of PMI years early. Check what home values and rates look like in your state to gauge whether this is worth pursuing.

A worked example: canceling early

Suppose you bought that $400,000 home with 5% down ($380,000 loan) and PMI at $190/month.

• By the original schedule, reaching 80% LTV ($320,000 balance) through normal payments alone might take roughly 8–9 years at 6.5%, because early payments are mostly interest (see how amortization works).
• But if you make occasional extra principal payments or the home appreciates 10% to $440,000, your equity math changes fast. At $440,000, you'd only need your balance at 80% of that — $352,000 — to be eligible by current value, which you could reach years sooner.

The lesson: track your equity actively. The day you cross 20%, send the cancellation request. Don't wait for the automatic 78% trigger and donate extra PMI to your lender for free.

Ways to avoid PMI entirely

PMI isn't your only option if you'd rather skip it:

• Put 20% down. The cleanest path, if you can afford it without draining your emergency fund — weigh that in how much down payment you need.
• Use a VA or USDA loan if you qualify — neither charges monthly PMI.
• Piggyback loan (80-10-10): a first mortgage at 80% LTV, a second loan for 10%, and 10% down, structured to avoid PMI. These add complexity and a second payment, so run the full math first.
• Lender-paid PMI, accepting a higher rate — but as noted, that rate is permanent, so compare the lifetime cost on the calculator before choosing it.

The bottom line

PMI is the price of buying with less than 20% down on a conventional loan — typically 0.3% to 1.5% of the loan a year, often around $100 to $300 a month. It's not money down the drain if it lets you buy years sooner, but it is temporary, and that's the key. Get standard monthly PMI, track your equity, and request cancellation the moment you hit 20% — through payments, extra principal, or appreciation. Run your specific loan through the mortgage calculator to see what PMI adds to your payment, then make a plan to cancel it as fast as the rules allow.