Private Mortgage Insurance (PMI) is insurance that protects the lender — not you — if you default on your loan. Lenders require it when your down payment is less than 20% because a smaller down payment means a higher loan-to-value ratio (LTV) and more risk for the lender.
How Much Does PMI Cost?
PMI typically costs 0.5%–1.5% of the loan amount per year, depending on your credit score, down payment, and lender. On a $400,000 loan, that's $2,000–$6,000 per year, or roughly $167–$500 per month added to your payment.
The cost is calculated on the original loan amount (not the current balance), which is why it feels like dead money — you're paying it even after you've built some equity.
When Does PMI Go Away?
Under the federal Homeowners Protection Act (HPA), PMI cancellation works like this:
- Automatic cancellation — the lender must cancel PMI when your balance reaches 78% of the original purchase price (based on scheduled payments, not market value).
- Borrower-requested cancellation — you can request cancellation when your balance reaches 80% of the original value. The lender may require a good payment history and an appraisal.
This means PMI is based on your original home value, not current market value — unless your home has appreciated significantly and you request a new appraisal to prove it.
How Extra Payments Accelerate PMI Drop-Off
Because PMI cancels when your balance hits 80% of original value, any extra principal payment moves you there faster. The more you pay early, the sooner you cross the 80% threshold — and the sooner that monthly cost disappears.
On a $450,000 home with 10% down ($405,000 loan), you need your balance to reach $360,000 (80% of $450,000) for PMI to cancel. That might take 9–10 years at a normal pace. Adding $300/month in extra payments could cut that down to 5–6 years, saving thousands in PMI premiums.
PMI vs. MIP: What's the Difference?
FHA loans don't use PMI — they use a Mortgage Insurance Premium (MIP). MIP has two parts: an upfront premium (1.75% of the loan, usually rolled into the loan) and an annual premium (0.55%– 1.05%). The big difference: MIP often stays for the life of the loan if your down payment was less than 10%, not just until you hit 80% LTV.
VA loans have no PMI or MIP at all — instead, borrowers pay a one-time VA funding fee (typically 2.15% for first use).
Avoiding PMI Without 20% Down
If you don't have 20% down, there are a few strategies:
- Piggyback loan (80/10/10) — a first mortgage for 80% and a second mortgage for 10%, so neither lender triggers PMI. The second loan typically has a higher rate.
- Lender-paid PMI (LPMI)— the lender pays the PMI upfront and charges you a slightly higher interest rate instead. The rate bump stays for the life of the loan even after you would have hit 80% LTV, so this often isn't cheaper long-term.
- Wait and save more — the simplest option if timing allows.