What Is PMI and How Do You Get Rid of It?

PMI, or private mortgage insurance, is insurance that protects your lender if you stop making payments on a conventional mortgage. Lenders usually require it when your down payment is less than 20% of the home’s price. You pay the premium, typically as part of your monthly mortgage payment, but you can get rid of it: under federal law you can ask to cancel it once your loan balance reaches 80% of your home’s original value, and it must end automatically when your balance is scheduled to reach 78%.

Below, you’ll see how PMI works, a worked example showing when it would end on a real loan, and ways to remove it sooner.

Why lenders require PMI

When you make a small down payment, the lender has less of a cushion if it ever has to foreclose and sell the home. PMI covers part of that risk. In exchange, you can buy a home years earlier than if you had to save a full 20%.

It’s important to understand who’s protected: PMI covers the lender, not you. It doesn’t make your payment if you lose your job, and it doesn’t stop foreclosure.

How you pay for PMI

PMI can be structured a few ways:

• Monthly premiums. The most common setup: a monthly charge added to your mortgage payment.
• Single upfront premium. You pay the whole premium at closing, or it’s financed into the loan.
• Split premium. Part upfront, part monthly.
• Lender-paid mortgage insurance. The lender pays the premium in exchange for a higher interest rate. This kind generally can’t be canceled the same way, because it’s built into your rate for the life of the loan.

The cost depends on factors including your credit score, your down payment and the loan type. Your Loan Estimate shows the exact amount and how long it’s expected to last.

When PMI ends: the federal rules

The Homeowners Protection Act sets cancellation rules for PMI on most conventional loans for a primary residence that closed on or after July 29, 1999. According to the Consumer Financial Protection Bureau, there are three ways PMI ends:

“Original value” generally means the lower of the purchase price or the appraised value when you bought the home.

Requirements to cancel at 80%

To have PMI removed at the 80% mark, the CFPB says you generally must:

1. Make the request in writing.
2. Have a good payment history and be current on payments.
3. Certify there are no junior liens, such as a second mortgage or home equity line, on the home.
4. Show, if the servicer asks, that the home’s value hasn’t fallen below its original value, often with an appraisal.

Your PMI disclosure, provided at closing, lists the date your balance is scheduled to reach 80%. You can request cancellation earlier if extra payments get you there sooner. The automatic 78% termination, on the other hand, follows the original payment schedule, so extra payments don’t move that date. That’s why it pays to ask.

A worked example: when would PMI end?

Say you buy a $400,000 home with 10% down ($40,000), borrowing $360,000 at 6.5% for 30 years. Your principal and interest payment is $2,275.44. Adding property tax at 1.1% of the home’s value ($366.67 a month) and $1,800 a year for insurance ($150 a month), you’d pay $2,792.11 before PMI.

For illustration, suppose your PMI costs 0.5% of the loan amount per year. That’s a hypothetical rate; yours will depend on your credit, down payment and lender. On $360,000, that’s $150 a month, bringing your total to $2,942.11.

Here’s when PMI would end on the regular payment schedule, assuming the premium stays at $150:

Simply requesting cancellation at 80% instead of waiting for automatic termination would save roughly $2,100 in this example.

Getting there faster with extra payments

Now suppose you add $200 a month toward principal. Your balance would hit $320,000 at payment 64, about 5 years and 4 months in, more than two and a half years sooner. If you request cancellation then, you’d pay about $9,600 in PMI, roughly $6,750 less than if you waited for automatic termination on the original schedule.

The mortgage calculator shows a PMI notice when your down payment is under 20%. Try different down payments to see how your loan amount and payment change.

How to request PMI cancellation, step by step

When you’re close to the 80% mark, you don’t have to wait for your servicer to act:

1. Find your numbers. Check your current principal balance on your statement and compare it with 80% of your home’s original value. In the example above, that’s $320,000.
2. Review your PMI disclosure or call your servicer to confirm the scheduled 80% date and its specific requirements.
3. Send a written request. Include your loan number and ask to cancel PMI under the Homeowners Protection Act. Keep a copy and note the date you sent it.
4. Be ready for an appraisal. Your servicer may ask for evidence that your home’s value hasn’t fallen below its original value. Ask who orders the appraisal and who pays for it before you schedule one.
5. Confirm the change. Once PMI is removed, check that your next statement and escrow account reflect the lower payment.

If your request is denied, ask the servicer to explain the reason in writing, so you know what you need to fix.

Other ways to get rid of PMI

• Your home’s value rises. The federal rules use the original value, but many servicers will consider removing PMI based on a new appraisal if your home has appreciated or you’ve made improvements. Policies vary, so ask your servicer what’s required.
• Refinance. If your home is now worth enough that the new loan would be 80% or less of its value, a refinance could eliminate PMI. Weigh closing costs and the new interest rate before deciding.
• Recast or lump-sum payment. A large principal payment, such as from a bonus or inheritance, can bring you to 80% in one step. Then send your cancellation request.

Should you avoid PMI altogether?

Not necessarily. Waiting years to save 20% can mean paying rent the whole time, while home prices and rates may change in either direction. PMI is a cost, but it can be a reasonable price for buying sooner, especially if you plan to remove it.

On the other hand, putting down less money means a larger loan and more interest. Compare the full monthly cost at different down payments, and make sure you’ll still have an emergency fund after closing. Our guide on how much house you can afford walks through the numbers lenders look at, and how to save for a big purchase can help you build a bigger down payment.

PMI and your loan term

A shorter loan term pays down principal faster, so you reach 80% sooner. If you’re deciding between terms, our comparison of the 15-year vs. 30-year mortgage shows how quickly each builds equity.

The bottom line

PMI is the cost of buying a home with less than 20% down on a conventional loan. It protects the lender, but it doesn’t have to last forever. Mark the date your balance is scheduled to reach 80% of your home’s original value, send a written cancellation request when you get there, and consider extra principal payments to get there sooner. In our example, a $200 monthly prepayment would let you request cancellation more than two and a half years earlier and save thousands in premiums.

This content is for educational purposes only and isn't financial advice. Calculator results are estimates based on the numbers you enter. For decisions about your situation, consider talking with a qualified professional. Read our full disclaimer.