What Is PMI? Private Mortgage Insurance Rules, Costs & Removal
Understand Private Mortgage Insurance (PMI): how it works, how much it costs, how it is calculated, and the legal rules for cancellation under the Homeowners Protection Act.
Key Takeaway
Private Mortgage Insurance protects the lender—not you—if you default. It is standard on conventional loans with down payments below 20%, but federal law gives you the right to request cancellation once your loan-to-value ratio reaches 80%.
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is an insurance policy that conventional mortgage lenders require from borrowers who put down less than 20% of the home purchase price. It protects the lender against financial loss if you stop making mortgage payments and the property goes into foreclosure.
It is important to understand that PMI provides zero insurance protection to you as the borrower; its sole function is safeguarding the lending institution.
How Much Does PMI Cost?
PMI costs generally range from 0.2% to 1.5% of your original loan amount each year. The exact premium rate depends primarily on two factors:
- Credit Score: Borrowers with higher credit scores (740+) qualify for substantially lower PMI rates than borrowers with scores near 620.
- Loan-to-Value (LTV) Ratio: Putting 15% down results in lower monthly PMI than putting down only 3% or 5%.
How to Cancel PMI Under the Homeowners Protection Act (HPA)
The federal Homeowners Protection Act of 1998 (also known as the PMI Cancellation Act) establishes clear statutory rights for homeowners to eliminate borrower-paid PMI:
- Borrower-Requested Cancellation: You have the legal right to request written cancellation of PMI once your loan balance reaches 80% of the original purchase price (or appraised value at closing), provided you have a good payment history.
- Automatic Termination: Your mortgage servicer is legally required to terminate PMI automatically when your mortgage balance reaches 78% of the original value based on the original amortization schedule.
- Removal via Market Appreciation: If substantial home renovations or broad market price gains push your current equity above 20% to 25%, you can request cancellation early by paying for a new lender-ordered appraisal.
Run Your Numbers with the Mortgage Calculator
Put these concepts into practice. Test different inputs, compare scenarios, and see your customized payment or savings breakdown.
Sources & Methodology
FinoQuick mathematical models are deterministic and adhere to statutory lending standards, Consumer Financial Protection Bureau regulations, and IRS publications.
Frequently Asked Questions
Related Guides & Articles
Deepen your understanding with these closely related personal finance topics.
How Mortgage Payments Are Calculated: Principal, Interest & Escrow
Learn how monthly mortgage payments are determined using standard annuity formulas, plus how property taxes, homeowners insurance, and PMI impact your total housing cost.
Mortgage Amortization Explained: How Payments Shift Over Time
Understand how amortization schedules work, why early mortgage payments are interest-heavy, and how extra principal payments accelerate debt freedom.
Saving vs. Investing: How to Choose Based on Time Horizon & Risk
Understand the vital differences between saving in cash and investing in markets: risk levels, inflation protection, liquidity, and appropriate timelines for each.