What is PMI and when does it go away?

Private mortgage insurance (PMI) is a monthly charge added to many conventional mortgages when the down payment is less than 20 percent of the purchase price. It protects the lender, not you, against the higher chance of loss on a loan that starts with little equity. Under federal law it must end automatically once your scheduled balance reaches 78 percent of the home's original value, and you can ask to cancel it once you reach 80 percent.

What PMI is and who it protects

When you borrow most of a home's price, the lender has a thin cushion if the loan goes bad and the house has to be sold. PMI is an insurance policy that pays the lender part of its loss in that situation. You pay the premium, but the coverage belongs to the lender.

The name can be misleading. PMI does not pay your mortgage if you lose your job, does not cover the house against fire or storms (that is homeowner's insurance), and does not build equity. It is simply the price of borrowing with a small down payment on a conventional loan.

PMI is usually collected as a monthly premium added to your total monthly housing payment alongside principal and interest (P&I), property tax and homeowner's insurance. Government-backed loans use different insurance programs with their own rules, so the thresholds below apply to conventional loans.

The 20 percent down payment threshold

Lenders measure your starting equity with the loan-to-value (LTV) ratio: the loan amount divided by the home's price. A 20 percent down payment gives an LTV of exactly 80 percent, and PMI is generally required only when LTV is strictly above 80 percent.

A few examples on a $450,000 home:

• 20 percent down ($90,000) is a $360,000 loan and 80.0 percent LTV; no PMI.
• 10 percent down ($45,000) is a $405,000 loan and 90.0 percent LTV; PMI applies.
• 5 percent down ($22,500) is a $427,500 loan and 95.0 percent LTV; PMI applies.

Down payment and LTV describe the same thing from two directions, which is why the calculator links the dollar and percent fields. For how the down payment shapes the rest of the loan, see down payments explained.

What PMI typically costs

PMI is quoted as an annual rate applied to the loan amount, then divided by 12 for the monthly charge. Actual rates depend on the borrower's credit profile, the LTV, the loan type and the insurer, so any figure you see before applying is an estimate.

PMI per month = loan amount × annual PMI rate ÷ 12

The mortgage calculator's default is 0.5 percent per year, which you can change, or you can enter a monthly amount from a lender's estimate instead. Because the rate is applied to the original loan, the monthly charge stays flat until it is removed.

When PMI goes away

The Homeowners Protection Act sets three points at which PMI on a conventional loan ends. All three are measured against the home's original value and the amortization schedule you agreed to, not today's market value.

1. Borrower-requested cancellation at 80 percent LTV. Once your balance is scheduled to reach 80 percent of the original value, you can ask in writing to cancel PMI. The servicer must agree if you have a good payment history, are current on payments, and can show the property has not lost value.
2. Automatic termination at 78 percent LTV. When the balance is scheduled to reach 78 percent of the original value, the servicer must terminate PMI on its own, provided you are current on payments. You do not need to ask.
3. Final termination at the midpoint of the loan. If neither has happened, PMI must end the month after the midpoint of the amortization schedule (15 years into a 30-year loan), again as long as you are current.

Because the 80 percent rule requires a request and the 78 percent rule does not, the mortgage calculator models the automatic rule: PMI is charged every month the starting balance is above 78 percent of the price and stops with the first payment after the balance crosses that line. If you ask at 80 percent, your actual PMI period may be a few months shorter than the estimate.

A worked example

The calculator's built-in example is a $450,000 home bought with 10 percent down ($45,000) on a 30-year fixed-rate loan at 6.5 percent, with property tax of $5,400 per year, homeowner's insurance of $1,800 per year and HOA dues of $100 per month. Based on those assumptions:

• The loan amount is $405,000 and the starting LTV is 90.0 percent, so PMI applies.
• Estimated PMI is $405,000 × 0.5 percent ÷ 12, or about $169 per month.
• The removal threshold is 78 percent of $450,000, which is $351,000.
• With the estimated P&I payment of about $2,560, the balance drops below $351,000 after payment 109, so PMI is charged for about 109 months (roughly 9 years 1 month).
• Total estimated PMI is 109 months of about $169, approximately $18,400.

The balance takes nine years to fall 12 percentage points because early payments are mostly interest; principal vs. interest walks through why.

What changes the outcome

Three inputs control how long PMI lasts and what it costs. The figures below use the same $450,000 home at 6.5 percent over 30 years and are estimates based on those assumptions.

Down payment. This is the biggest lever. It changes both the monthly charge (a smaller loan means a smaller premium) and the distance to the 78 percent line.

• 5 percent down: about $178 per month for about 135 months, roughly $24,000 in total.
• 10 percent down: about $169 per month for about 109 months, roughly $18,400 in total.
• 15 percent down: about $159 per month for about 75 months, roughly $12,000 in total.
• 20 percent down: no PMI.

Additional monthly payment. Every extra dollar goes straight to the balance, so you reach the removal threshold earlier. On the 10 percent down example, adding $250 per month to principal cuts the estimated PMI period from about 109 months to about 72 months and the total from roughly $18,400 to roughly $12,200. Adding $500 per month cuts it to about 54 months and roughly $9,100. The extra payments also reduce lifetime interest and shorten the loan; see how mortgage payments work for that side of the story.

Loan term and rate. A shorter term or a lower rate pays principal down faster, so the balance crosses 78 percent sooner. The PMI rate itself changes the monthly amount and the total, but not the number of months.

Common mistakes and misconceptions

• Thinking PMI protects you. It protects the lender. Coverage for your own payments is a separate product and a separate decision.
• Expecting PMI to end at 20 percent equity automatically. Automatic termination is at 78 percent LTV, not 80. Reaching 80 percent gives you the right to request cancellation, but you have to make the request.
• Assuming rising home values remove PMI. The federal thresholds are measured against the original value on the amortization schedule. A servicer may consider a new appraisal for an earlier cancellation, but the law does not require it.
• Forgetting that being behind on payments delays removal. Both cancellation and automatic termination require that you are current on the loan.
• Treating the calculator's PMI figure as a quote. The 0.5 percent default is a placeholder; your rate could be lower or higher depending on your credit profile and the loan.
• Ignoring PMI when comparing down payment sizes. The trade-off between putting more cash down and keeping it in reserve involves more than the P&I payment; PMI months and total PMI are part of the comparison.

Private mortgage insurance (PMI)

Insurance on a conventional mortgage that reimburses the lender for part of its loss if the borrower defaults. Required when LTV is above 80 percent and paid by the borrower, typically monthly.

Loan-to-value (LTV)

The loan amount divided by the home's value, as a percentage. A 10 percent down payment produces a 90 percent LTV at closing; the ratio falls as the balance is paid down.

Original value

The home's value when the loan was made. The Homeowners Protection Act measures the 78 and 80 percent thresholds against this figure, not current market value.

Try it

To see how PMI fits into your own estimate, enter a home price and a down payment below 20 percent in the mortgage calculator. The results show the estimated monthly PMI, how many months it applies, the total, and the housing payment after it ends. Then compare a larger down payment or an additional monthly payment to see how much sooner the estimated PMI period ends based on the assumptions you enter.