Private Mortgage Insurance:
What It Is, What It Costs, and When It Goes Away

If you are buying a home with less than 20 percent down, your lender will require private mortgage insurance. Most buyers know it exists. Far fewer understand how it is calculated, or how to know exactly when it will stop.

Here is the full picture.

What PMI Actually Is

Private mortgage insurance protects the lender, not you.

When a borrower puts down less than 20 percent, the lender is exposed to more risk. If the borrower defaults and the home sells for less than the loan balance, the lender takes a loss. PMI covers that gap.

You pay for it. The lender benefits from it. That arrangement is worth understanding clearly, because it reframes the question from “how do I avoid PMI” to “what does PMI actually cost me, and when does that cost end.”

How PMI Is Calculated

PMI is typically expressed as an annual percentage of the original loan amount. The rate varies based on your loan-to-value ratio (LTV), credit score, and loan type, but for a conventional 30-year fixed mortgage with a 5 percent down payment, you can expect somewhere between 0.5 and 1.5 percent annually. A borrower with strong credit at 95 percent LTV typically lands around 0.8 percent.

Using the national median starter home price of $352,700:

That $223 appears as a line item on your monthly mortgage statement alongside principal, interest, and escrow — the portion collected by your servicer to cover property taxes, homeowner’s insurance, and where applicable, homeowner’s association fees. It stays constant until it is eliminated.

When PMI Goes Away

This is the part most buyers do not fully understand, and it is governed by a federal law called the Homeowners Protection Act of 1998.

The law establishes two cancellation points:

At 80% LTV based on current appraised value, you can request cancellation. Once your loan balance drops to 80 percent of your home’s current market value, you have the right to submit a written request to your servicer to cancel PMI. Your servicer will typically require a new appraisal to confirm current value, along with a satisfactory payment history. This is the threshold where appreciation makes a meaningful difference — a rising market reduces your LTV faster than principal paydown alone.

At 78% LTV based on the original appraised value, cancellation is automatic. Once your balance reaches 78 percent of the original purchase price based on the initial amortization schedule, your servicer is legally required to cancel PMI without any action on your part. This threshold does not account for appreciation, which is why requesting cancellation at 80% of current value almost always comes first.

The 4.5-Year Math

Two forces reduce your LTV simultaneously: principal paydown from your monthly payments, and home price appreciation.

With a $335,065 loan at roughly 6.75 percent on a 30-year fixed, your monthly payment is approximately $2,173 before taxes and insurance. In the early years, most of that payment goes toward interest. Your balance drops slowly from amortization alone.

But appreciation compounds alongside it. At 3 percent annual appreciation, the $352,700 home is worth:

Combined with normal principal paydown, your LTV hits 80 percent of current market value at roughly 4.5 years. You request cancellation, provide an updated appraisal, and the $223 monthly payment disappears.

Total PMI paid over that period: approximately $12,100.

PMI as a Short-Run Cost of a Long-Run Position

That $12,100 is the admission cost to enter the market at 5 percent down. It is worth putting that number in context.

A recent post on this blog walked through the full rent vs. buy comparison, including what happens to housing costs in retirement — the window most calculators never model. The long-run picture is more favorable to ownership than the early years suggest. The buyer who enters at 5 percent down pays PMI for 4.5 years and then owns an asset that continues to appreciate. The renter who waits to save a full 20 percent pays rent the entire time, chases a target that appreciates faster than most savings rates, and enters the retirement window with a substantially higher housing cost relative to portfolio income.

Waiting several years to avoid $12,100 in PMI while paying $1,750 per month in rent is, in most scenarios, the worse economic trade. PMI is not a penalty. It is the short-run cost of a long-run position.

Whether that trade makes sense depends on your specific numbers. But the framing matters: the question is not “how do I avoid PMI” — it is “how quickly can I get into a position where appreciation is working for me instead of against me.”

A Note on Rate and Credit Score

The 0.8 percent PMI rate above assumes a borrower with a credit score above 740. If your score is in the 680 to 720 range, your PMI rate may run closer to 1.2 to 1.5 percent annually. On the same loan, that is $335 to $419 per month instead of $223. The cancellation mechanics are identical. The total cost before cancellation is higher.

Before you close, ask your lender for the exact PMI rate on your loan and the specific cancellation terms in your mortgage contract.

FHA Mortgage Insurance: A Different Animal

Conventional PMI and FHA mortgage insurance are often conflated. They work very differently.

FHA loans charge an upfront mortgage insurance premium (1.75 percent of the loan amount, typically rolled into the loan) plus an annual premium that runs between 0.55 and 0.75 percent depending on loan size and term.

The critical difference: FHA mortgage insurance does not cancel automatically based on equity the way PMI does. For most FHA loans originated after June 2013, the annual premium runs for the life of the loan. The only way to remove it is to refinance into a conventional loan once you have sufficient equity.

For a borrower who expects to build equity quickly through appreciation or accelerated payments, that distinction matters. The conventional PMI path gives you a clean exit. The FHA path requires an active decision to refinance.

If an FHA loan is your path to homeownership, it is a legitimate one. Just account for that permanent insurance cost in your long-term math, or plan for a refi once you cross the 20 percent equity threshold.

The Number to Track

Your LTV is the only number that determines when PMI ends.

Most servicers will provide your current balance on your monthly statement. Your lender is required to provide an annual statement showing the date PMI will automatically terminate based on the original amortization schedule. If your home has appreciated materially, it is worth requesting a current appraisal and submitting a written cancellation request at 80 percent LTV rather than waiting for the automatic 78 percent threshold.

The math on inaction is stark. In a market appreciating at 3 percent annually, automatic cancellation at 78 percent of the original purchase price arrives at roughly 11.6 years based on the amortization schedule alone. Requesting cancellation at 80 percent of current appraised value arrives at roughly 4.2 years. The difference is 89 months and nearly $20,000 in PMI payments on our example loan.

Know the number. Request the cancellation. Do not wait for it to happen on its own schedule.