PMI Explained: What It Is and How to Remove It

If you bought a home with less than 20% down, you're almost certainly paying private mortgage insurance (PMI)—a monthly fee that protects your lender, not you, in case you default. On a typical $400,000 loan with 5% down, PMI adds $150–$300 to your monthly payment, which works out to $1,800–$3,600 per year of pure cost that builds no equity and earns no return. Over five years, that's $9,000–$18,000 leaving your pocket.

The good news is that PMI is not permanent. By law and by lender policy, you have several paths to remove it—and doing so as early as possible can be one of the highest-return financial moves available to a homeowner. This guide explains what PMI is, how it's calculated, and the four ways to get rid of it.

What is PMI and why do lenders charge it?

Private mortgage insurance is a policy that pays the lender if you default on your conventional mortgage. It does not protect you, your family, or your home—it protects the lender against the elevated risk of low-down-payment loans. Statistically, borrowers with less than 20% equity default at higher rates than those with more skin in the game, and PMI is how lenders manage that risk.

PMI is required on conventional loans when your loan-to-value (LTV) ratio exceeds 80% at the time of origination. Once your LTV drops below 80% through payments, appreciation, or improvements, you can usually remove it.

How much does PMI cost?

PMI rates range from 0.3% to 1.5% of the original loan amount per year, depending on your credit score, down payment, and loan type. Borrowers with excellent credit and 10% down might pay 0.3%, while borrowers with fair credit and 3% down might pay 1.5%—a fivefold difference for the same coverage.

Here's how monthly PMI typically breaks down on a $400,000 loan:

On a $400,000 loan with 5% down and a 680 credit score, PMI costs roughly $2,820 per year. Over the typical 6–8 years a borrower carries PMI, that's $17,000–$22,000 in pure cost. Eliminating PMI early is one of the highest-return financial moves available—often equivalent to a guaranteed 10–20% return on the money used to do it.

When is PMI required?

PMI is triggered when your loan-to-value ratio exceeds 80% on a conventional loan. LTV is calculated as the loan balance divided by the home's value. If you buy a $400,000 home with a $360,000 loan, your starting LTV is 90%, and PMI is required.

Government-backed loans have their own mortgage insurance rules:

• FHA loans require mortgage insurance premium (MIP) for the life of the loan if your down payment is less than 10%. With 10%+ down, MIP can be removed after 11 years.
• VA loans have no monthly mortgage insurance but charge an upfront funding fee.
• USDA loans charge both an upfront guarantee fee and an annual fee (0.35% of loan balance) for the life of the loan.

If you have an FHA loan with less than 10% down and want to drop mortgage insurance, refinancing into a conventional loan is typically the only path—see our section on refinancing below.

The four ways to remove PMI

Method 1: Automatic termination at 78% LTV

Federal law (the Homeowners Protection Act of 1998) requires lenders to automatically cancel PMI when your loan balance reaches 78% of the original home value (or original appraised value if no appraisal was used at purchase)—as long as your payments are current. The lender cannot require you to do anything; the cancellation happens on the scheduled date.

For a $360,000 loan on a $400,000 home, this happens when your balance reaches $312,000. On a 30-year loan at 6.5%, that's roughly year 11 of the loan—not particularly fast. The law applies only to conventional loans originated after July 29, 1999, and excludes high-risk loans (which can extend to the midpoint of the loan term).

Method 2: Request cancellation at 80% LTV

The same law lets you request PMI cancellation as soon as your loan balance reaches 80% of the original value—provided your payments are current, you have a good payment history, and you can demonstrate the home's value hasn't declined. This typically happens 1–2 years before automatic termination.

On that same $360,000 loan, you can request cancellation when your balance reaches $320,000. On a 30-year at 6.5%, that's around year 9. Still slow. To accelerate, combine with method 3 or 4 below.

Method 3: Use a new appraisal to reflect appreciation

The fastest path to PMI removal is using current home value instead of original value. If your home has appreciated or you've made significant improvements, your LTV may already be below 80% based on today's value—even if your loan balance hasn't dropped much.

Example: You bought a $400,000 home with 5% down ($20,000). Three years later, your loan balance is $360,000, but the home is now worth $480,000. Your LTV based on current value is 75%—below the 80% threshold. Most lenders will let you request cancellation based on a new appraisal, but they typically require:

• Minimum 2 years of on-time payments
• No 30-day late payments in the last 12 months
• No liens or second mortgages
• An appraisal from their approved appraiser (you pay, $300–$500)
• Often an LTV of 75% or lower (not 80%) if relying on appreciation alone

Check with your servicer for their specific requirements—policies vary by investor (Fannie Mae, Freddie Mac, portfolio lenders).

Method 4: Refinance into a new loan

If you have an FHA loan, refinancing into a conventional loan is often the only way to drop mortgage insurance. If your home has appreciated enough that the new loan is at or below 80% LTV, the new conventional loan won't require PMI at all.

Refinancing comes with closing costs (2–5% of the loan amount), so run the math: if refinancing costs $6,000 and saves you $200/month in PMI plus another $100/month from a lower rate, you'll break even in 20 months. Use our Refinance Calculator to model your scenario. Be careful: refinancing resets your loan term, so you may pay more interest over the new 30-year term even with a lower rate.

FHA MIP vs. conventional PMI: a critical difference

Many first-time buyers choose FHA loans for the low 3.5% down payment, not realizing that FHA mortgage insurance is far more expensive and harder to remove than conventional PMI.

On a $385,000 FHA loan (3.5% down on a $400,000 home), MIP includes $6,738 upfront plus roughly $270/month for the life of the loan—totaling over $100,000 if you keep the loan 30 years. If your credit score is 680+, a conventional loan with PMI is almost always cheaper long-term, even with a slightly higher rate.

How to calculate your PMI savings

Removing PMI is a guaranteed, risk-free return. Suppose you owe $340,000 on a home now worth $450,000 (LTV 75.5%). You can either:

1. Pay down the loan to 80% LTV—pay $10,000 to principal to bring the balance to $330,000 (73% LTV). If your PMI is $220/month ($2,640/year), that's a 26.4% annual return on your $10,000—tax-free and guaranteed.
2. Order an appraisal—pay $400 for an appraisal that confirms the current value. If your PMI is $220/month, you save $2,640/year, an instantaneous 660% return on the appraisal fee.
3. Refinance—pay $6,000 in closing costs to remove $2,640/year of PMI plus capture a lower rate. Break-even is 27 months plus rate savings.

For most homeowners with appreciating homes, option 2 (appraisal) is the fastest, cheapest path. Check current home values with our Home Worth Estimator before paying for an appraisal.

Lender-paid PMI: when it makes sense

Lender-paid PMI (LPMI) bakes the PMI cost into a higher interest rate, eliminating the separate monthly fee. This can be attractive if you're cash-constrained or expect to move within 5–7 years. The catch: LPMI never goes away. Even after you reach 80% LTV, your rate stays elevated.

LPMI typically costs 0.25–0.50% in additional rate. On a $400,000 loan, paying 0.375% more to avoid $200/month in PMI saves you money for the first 6–7 years. After that, you'd be better off with borrower-paid PMI that you can cancel. Run both scenarios through our Mortgage Payment Calculator to compare.

Tracking your LTV: a simple spreadsheet exercise

PMI removal starts with knowing your LTV—and most homeowners don't track it. Set up a simple spreadsheet with three columns: current loan balance (from your monthly statement), estimated home value (from our Home Worth Estimator, updated annually), and LTV (loan balance ÷ home value). Update quarterly.

When your LTV approaches 80%, contact your servicer in writing (email is fine—keep a paper trail) to request PMI cancellation. Include your loan number, current balance, and evidence of value (recent comparable sales, online estimates, or a broker's price opinion). Most servicers respond within 30 days. If they deny the request, ask specifically what threshold they require—many want 75% LTV based on appreciation alone, while 80% works if you've paid down the loan to that level.

Borrower-paid PMI on conventional loans has clear federal rules. Servicer-paid or lender-paid PMI (where the cost is built into the rate) does not have automatic termination rights—only refinancing removes it. Read your loan documents carefully before assuming you can drop the cost later.

Common mistakes to avoid

• Waiting for automatic cancellation. The 78% automatic rule is the slowest path. If your home has appreciated, request early removal at 80% using a new appraisal—you could save years of premiums.
• Assuming FHA MIP works like conventional PMI. It doesn't. FHA loans with less than 10% down carry MIP for life. If you have an FHA loan, plan to refinance into conventional once you reach 80% LTV.
• Forgetting about your right to request removal. Lenders won't proactively tell you when you qualify. Track your LTV and submit the request the moment you hit 80%.
• Making late payments. Most lenders require 12 months of on-time payments before approving a removal request. A single 30-day late payment can delay your PMI cancellation by a full year.
• Ignoring home improvements. Major renovations—a new kitchen, added square footage, finished basement—can boost your appraised value enough to clear 80% LTV. Document everything for the appraiser.
• Picking LPMI when you'll stay long-term. If you expect to be in the home 10+ years, borrower-paid PMI is almost always cheaper because you can cancel it.

Frequently asked questions

How do I know when I've reached 80% LTV?

Divide your current loan balance by the home's current value. Find your loan balance on your monthly statement. Estimate current value using online tools (Zillow, Redfin) or a broker's price opinion. If your LTV is at or below 80%, contact your servicer in writing to request PMI cancellation.

Will my lender automatically remove PMI?

Only at 78% LTV based on the original home value, and only if your payments are current. To remove PMI earlier—at 80% LTV or based on current value—you must request it in writing.

Can I remove PMI if I have a second mortgage or HELOC?

Usually not until the second mortgage is paid off or subordinated, and the combined LTV (CLTV) is below 80%. Some lenders allow PMI removal with a HELOC in place if the CLTV is 75% or lower.

Is PMI tax deductible?

PMI was deductible as mortgage insurance through 2021 under a provision that has expired and been reinstated multiple times. Check current tax law—deductibility phases out at AGI above $100,000 ($50,000 married filing separately) and disappears entirely above $109,000.

What if my appraisal comes in low?

If your new appraisal doesn't bring LTV to 80%, you'll have to wait until you've paid down the loan or made improvements. You're out the appraisal fee ($300–$500), but you'll have a clearer picture of when removal will be possible.