PMI (Private Mortgage Insurance)

Quick Definition

Private Mortgage Insurance (PMI) is insurance that a borrower pays to protect the lender — not the borrower — when the down payment on a conventional mortgage is less than 20% of the home's purchase price. PMI compensates the lender if the borrower defaults and the foreclosure sale does not fully cover the outstanding loan balance. It adds $50-$250+ per month to the borrower's housing costs until the loan-to-value ratio reaches 80%.

What It Means

PMI exists because loans with less than 20% down are statistically more likely to default — borrowers with less equity have less financial skin in the game. The lender requires PMI to offset this elevated risk. The paradox: you pay the premiums, but the lender is the beneficiary. PMI provides you nothing — it only protects the lender.

Despite being a pure cost to the borrower, PMI enables homeownership for buyers who cannot save a full 20% down payment — making it a necessary but expensive trade-off.

When PMI Is Required

PMI Cost Factors and Typical Rates

Typical annual PMI rates by LTV and credit score:

Monthly cost example — $400,000 home, 5% down ($20,000), $380,000 loan, 0.7% PMI rate: PMI = $380,000 × 0.7% ÷ 12 = $222/month

How to Cancel PMI

The Homeowners Protection Act (HPA) of 1998 gives borrowers legal rights to cancel PMI:

Acceleration timeline example — $320,000 loan at 7%, 30-year:

• Original amortization reaches 78% LTV: approximately Year 11 of 30
• With extra $200/month payments: approximately Year 8
• With 10% appreciation: potentially Year 5-6

PMI Types

LPMI trade-off: A 0.25-0.375% rate increase on a $320,000 loan = $800-$1,200/year extra interest, potentially for 30 years — compared to BPMI that cancels in 7-10 years. BPMI is usually better for buyers who plan to stay and build equity.

PMI vs. FHA MIP: Key Differences

For borrowers with 5-10% down and good credit (680+), conventional + PMI is usually cheaper than FHA + MIP because PMI eventually cancels while FHA MIP on low-down-payment loans is permanent.

The "Piggyback Loan" PMI Avoidance Strategy

Some buyers use a "piggyback" second mortgage to avoid PMI on a conventional loan:

80/10/10 structure:

• 80% first mortgage — no PMI required
• 10% second mortgage (HELOC or fixed second)
• 10% down payment

Trade-off: The second mortgage typically has a higher rate (8-10%) vs. first mortgage. The question is whether the higher rate on the second mortgage costs more or less than PMI would. In most cases, PMI is cheaper than the piggyback approach — unless you have a high credit score PMI rate or plan to pay off the second quickly.

Key Points to Remember

• PMI protects the lender, not you — you pay premiums that benefit someone else
• Required on conventional loans when down payment is less than 20%
• Typical cost: $50-$250/month depending on loan size, LTV, and credit
• Federal law (HPA) requires automatic cancellation at 78% LTV and borrower rights to cancel at 80%
• VA loans have no PMI — one of the most significant VA benefits
• FHA MIP is similar to PMI but cannot be cancelled for most borrowers — a key reason to consider conventional over FHA for buyers with good credit

Frequently Asked Questions

Q: Is PMI tax-deductible? A: Historically yes — PMI premiums were deductible as mortgage interest for certain income levels. This deduction expired in 2021 and has not been renewed as of 2024. Check the current tax code for any reinstatement. Even when available, the deduction was subject to phase-outs above $100,000 adjusted gross income.

Q: Can I cancel PMI as soon as I have 20% equity? A: You can request cancellation at 80% LTV based on the original purchase price and original amortization schedule. Lenders are not required to use current appreciated value for borrower-initiated cancellation unless you order an appraisal and meet specific seasoning requirements (typically 2+ years of payments). Some lenders allow cancellation based on current value after 2 years (80% LTV) or 5 years (75% LTV). Check your lender's specific policy.

Q: Should I put 20% down to avoid PMI, or invest the extra cash? A: The math depends on the PMI rate, your investment return expectation, and how long you'll carry PMI. If PMI is $200/month and you expect 7% returns on invested capital, investing the down payment difference can be better than putting 20% down — especially if PMI will only last 5-7 years. In a 7%+ mortgage rate environment, paying down debt may outperform investment returns. The calculation changes as rates and expected returns change.