PMI (Private Mortgage Insurance)

What PMI is

PMI (Private Mortgage Insurance) is insurance that protects the lender (not you) when you put down less than 20% on a conventional mortgage. It's required by lenders because loans with less than 20% down payment are considered higher risk. PMI increases your monthly mortgage payment, typically adding $50-200/month depending on your loan amount, down payment, and credit score. The cost is usually 0.5-1.5% of the loan amount annually, divided into monthly payments. For example, on a $300,000 loan with 10% down ($30,000), PMI might cost $150-300/month. PMI doesn't protect you—it protects the lender if you default. If you default, PMI pays the lender, not you. This is why PMI feels like 'wasted money' to many borrowers, and why removing it as soon as possible is a priority.

When PMI is required

PMI is typically required for conventional loans (Fannie Mae/Freddie Mac) when your down payment is less than 20%. For FHA loans, you pay MIP (Mortgage Insurance Premium) instead, which has different rules. VA loans (for veterans) don't require PMI. USDA loans have their own mortgage insurance. The 20% threshold is the industry standard because lenders consider loans with 20%+ equity less risky—if you default, they can likely recover their money through foreclosure. Some lenders may require PMI even with 20% down if you have poor credit or other risk factors, but this is rare. The key is that PMI is about loan-to-value (LTV) ratio: if LTV > 80%, PMI is usually required.

How PMI is calculated

PMI cost depends on several factors: (1) Loan amount—larger loans = higher PMI. (2) Down payment—smaller down payment = higher PMI (and higher risk). (3) Credit score—lower credit score = higher PMI. (4) Loan type—some loan types have different PMI rates. (5) PMI provider—different insurers charge different rates. Typical PMI rates range from 0.5% to 1.5% of the loan amount annually. For example, on a $300,000 loan: 0.5% = $1,500/year = $125/month, 1.0% = $3,000/year = $250/month, 1.5% = $4,500/year = $375/month. Your lender will provide the exact PMI cost in your loan estimate and closing documents. PMI is usually added to your monthly mortgage payment along with principal, interest, taxes, and insurance (PITI + PMI).

How PMI ends (automatic vs manual removal)

PMI can end in several ways: (1) Automatic removal: For conventional loans, PMI automatically terminates when your loan-to-value (LTV) reaches 78% based on the original purchase price (or original appraised value, whichever is lower), assuming you've made on-time payments. This is required by the Homeowners Protection Act (HPA). However, you must request removal—it doesn't happen automatically at 80% LTV. (2) Manual removal: You can request PMI removal when LTV reaches 80% (based on original value) if you've made on-time payments and meet other lender requirements. Some lenders require an appraisal to confirm current value. (3) Refinancing: Refinancing into a new loan with 20%+ equity removes PMI (but you pay closing costs). (4) Home value appreciation: If your home's value increases significantly, you can request a new appraisal. If the new value puts you at 80% LTV or below, PMI can be removed. (5) Paying down principal: Making extra payments to reach 80% LTV triggers removal eligibility.

PMI removal requirements and pitfalls

To remove PMI, you typically need: (1) LTV at or below 80% (based on original value) or 75% (based on current appraised value). (2) On-time payment history (usually 12-24 months). (3) No second liens or home equity loans that push total LTV above 80%. (4) An appraisal (if using current value) showing sufficient equity. Common pitfalls: (1) Assuming PMI auto-removes at 80%—you must request it. (2) Not accounting for seasoning requirements—some lenders require 2 years of payments before allowing removal based on appreciation. (3) Appraisal costs—you'll pay $300-500 for an appraisal to prove current value. (4) Lender resistance—some lenders make removal difficult, requiring extensive documentation. (5) FHA loans—MIP (not PMI) often can't be removed without refinancing, even at 80% LTV. (6) Second mortgages—if you have a home equity loan, total LTV must be 80% or below, not just the first mortgage.

Common mistakes

Common mistakes with PMI include: (1) Ignoring PMI in affordability calculations—PMI can add $100-300/month to your payment, significantly affecting what you can afford. (2) Assuming PMI auto-removes—you must proactively request removal when eligible. (3) Not checking seasoning requirements—some lenders require 2 years before allowing removal based on appreciation. (4) Forgetting about appraisal costs—removal based on appreciation requires a $300-500 appraisal. (5) Not understanding FHA vs conventional—FHA MIP rules are different and often more restrictive. (6) Assuming all PMI is the same—rates vary by lender, credit score, and loan amount. Shop around. (7) Not considering the cost of waiting—if PMI costs $200/month and you're 6 months away from 80% LTV, that's $1,200 in PMI you could avoid by making extra payments.

Worked Example

Edge Cases & Special Situations