Insurance required when down payment is less than 20%, protecting the lender.
Private Mortgage Insurance (PMI) is insurance lenders require when your down payment is less than 20% (equivalently, LTV exceeds 80%). PMI protects the lender if you default and the home sells for less than the loan balance. PMI costs typically range from 0.5% to 1% annually of the loan balance (added to monthly mortgage payments). For example, on a $300,000 home with a 5% down payment ($15,000), the loan is $285,000, and PMI might cost $1,425–$2,850 annually ($119–$238 monthly). PMI can be removed once you reach 20% equity through a combination of payments and home appreciation, or by refinancing. Putting down 20% avoids PMI but requires more upfront capital. Lower-down-payment mortgages (FHA, VA, USDA loans) have mortgage insurance built in. Understanding PMI costs is important when deciding how much to put down.
PMI is calculated as an annual percentage of the original loan balance, ranging roughly 0.30%-1.50% depending on credit score, LTV at origination, and loan type. The annual premium is divided by 12 and added to your monthly mortgage payment. To estimate: PMI_monthly = (loan_amount × annual_rate) ÷ 12. Example: $285,000 loan × 0.75% ÷ 12 = $178/month. The Homeowners Protection Act of 1998 (HPA) establishes two MANDATORY cancellation triggers for borrower-paid PMI on most single-family primary residences: (1) "borrower-requested cancellation" — you can request PMI removal once the loan balance reaches 80% of the ORIGINAL property value, assuming you're current on payments and have a good payment history; (2) "automatic termination" — the lender MUST cancel PMI when the loan balance is scheduled to reach 78% of the original value (based on the amortization schedule, regardless of actual payments). A third path is "final-termination" at the loan's midpoint. Importantly, these triggers use ORIGINAL value — to use CURRENT (appreciated) value, you need a new appraisal and the lender's discretion. Common mistakes: (1) confusing PMI (conventional, conforming, removable) with FHA MIP (government, often permanent on loans originated after June 2013 with <10% down), (2) assuming PMI auto-removes at 80% — automatic removal is at 78%, request-based removal is at 80%, (3) not requesting PMI removal proactively when home prices rise — lenders are not required to monitor appreciation, (4) refinancing solely to remove PMI without modeling the closing costs against the monthly savings, (5) confusing single-premium PMI (paid upfront) with monthly PMI — the upfront version reduces monthly cost but adds non-recoverable cash at closing.
PMI typically costs 0.30%-1.50% of the loan amount annually, with the most common range being 0.5%-1%. On a $300,000 loan at 0.75% PMI, that's $2,250 per year or about $188 per month. The exact rate depends on credit score (higher = lower rate), LTV at origination (lower down payment = higher rate), and loan term. Single-premium and lender-paid PMI structures exist as alternatives to monthly PMI; the CFPB educational pages explain the trade-offs. Use the CalcFi PMI Removal Calculator with the original loan amount and current balance for a precise estimate.
Under the Homeowners Protection Act of 1998 (HPA), lenders MUST automatically terminate borrower-paid PMI when the loan balance is scheduled to reach 78% of the ORIGINAL property value, based on the amortization schedule — not based on actual extra payments or current home value. You can REQUEST cancellation once the scheduled balance hits 80% of original value, provided you're current on payments. To use the home's appreciated value to drop PMI faster, you typically need a new appraisal at your cost and lender approval; this is not automatic.
The mortgage insurance premium (MIP/PMI) deduction has been on-and-off in the U.S. tax code; it has expired and been extended several times. The current status should be verified against the latest IRS Publication 936 (Home Mortgage Interest Deduction). When available, the deduction phases out at higher incomes. Because this rule changes legislatively, treat any blanket "PMI is deductible" advice with caution and check the current IRS publication. CalcFi does not provide tax advice — confirm with a tax professional or IRS.gov for your filing year.
PMI is private — issued by insurers like MGIC, Genworth, Radian — and applies to CONFORMING (Fannie Mae/Freddie Mac eligible) loans with <20% down. It is removable under HPA rules. FHA Mortgage Insurance Premium (MIP) is government insurance on FHA loans. Per HUD's MIP schedule, FHA loans originated after June 2013 with less than 10% down typically carry MIP for the LIFE of the loan; only refinancing into a conventional loan eliminates it. VA loans use a one-time funding fee instead of ongoing insurance. USDA loans have an upfront guarantee fee plus annual fee.
Sometimes — model the math. The case for: if home values rose and you'd need an appraisal anyway for your current lender to drop PMI, a refinance can capture both PMI removal and a new rate. The case against: refinance closing costs typically run 2-5% of the loan amount ($6,000-$15,000 on a $300,000 loan). If your remaining PMI obligation is small ($150/month for 2 years = $3,600), the closing costs eat the savings. Compute the break-even (closing costs ÷ monthly PMI savings = months to recoup) and compare it to how long you plan to stay in the home.
Three main paths: (1) "Piggyback" or 80/10/10 loan — a first mortgage of 80%, a second mortgage (often a HELOC) of 10%, and 10% down. Avoids PMI but the second loan typically has a higher rate. (2) Lender-paid PMI (LPMI) — the lender pays PMI in exchange for a slightly higher interest rate. PMI never appears on your statement, but the rate is higher for the LIFE of the loan, so it's not removable. (3) VA loans (eligible veterans) and USDA loans (rural, income-limited) — neither requires PMI, though both have alternative fees. Some physician/professional mortgages also waive PMI for qualifying borrowers.
This definition is cross-checked against the following primary sources. All sources are free, public, and authoritative.