What Is PMI and How Do You Avoid It?

PMI protects the lender, not you — but you pay for it. Here is how much it costs and your options to eliminate it.

PMI is one of the most resented costs in homeownership — partly because it is significant (typically $100–$400/month), and partly because it benefits the lender, not you. But it is also a cost that can be eliminated with the right strategy, often years before the loan reaches 80% LTV on the scheduled payment plan. Understanding exactly how to get rid of it — and how fast — is worth knowing before you sign the loan.

How much does PMI cost?

PMI typically costs 0.5%–1.5% of the original loan amount per year, paid as a monthly addition to your mortgage payment. The exact rate depends on your credit score, loan-to-value ratio, and loan type.

For a buyer putting 5% down on a $380,000 home (loan of $361,000) with a 0.9% PMI rate, PMI adds approximately $271/month to the payment. Over the time it takes to reach 20% equity, this can total $10,000–$20,000 or more in PMI premiums.

When can you remove PMI?

Under the Homeowners Protection Act, conventional loan PMI must be cancelled automatically when your loan balance reaches 78% of the original purchase price (i.e. 22% equity based on the original value). You can also request cancellation once you reach 80% LTV (20% equity).

Two important distinctions:

• Automatic cancellation at 78% LTV — happens based on your original amortization schedule, without any action on your part. This is the minimum protection.
• Request cancellation at 80% LTV — you can request this in writing once your balance reaches 80% of the original value, potentially years before automatic cancellation. Your lender may require an appraisal to confirm value has not declined.

How to reach 20% equity faster

• Make extra principal payments. Every dollar above your required payment that goes to principal builds equity faster and accelerates the PMI cancellation date. Even an extra $100–$200/month can remove PMI 2–4 years earlier.
• Request a new appraisal if home values have risen. PMI cancellation can be based on current value, not just original purchase price. If your neighbourhood has appreciated significantly, a new appraisal may show you already have 20% equity. The appraisal cost ($300–$600) is typically worth it if you have been paying PMI for a few years.
• Make a lump-sum payment. A tax refund or bonus applied to principal can close the gap to 20% equity faster than incremental payments alone.

How to avoid PMI entirely

• Put 20% down. The direct solution — no PMI from day one. The trade-off is a larger upfront capital requirement.
• Piggyback loan (80/10/10). Take a first mortgage for 80% of the purchase price, a second mortgage (HELOC or home equity loan) for 10%, and put 10% down. No PMI because the first mortgage is at 80% LTV. The second loan has a higher rate, but the total cost is often less than PMI.
• Lender-paid PMI (LPMI). Some lenders offer a slightly higher interest rate in exchange for covering PMI themselves. This can be cost-effective if you plan to stay in the home long-term — the rate premium is permanent, so it eventually costs more than standard PMI would have, but it eliminates the monthly PMI line item.
• VA or USDA loans. Eligible borrowers (veterans for VA, rural properties for USDA) can buy with 0% down and no PMI. These programs have funding fees but typically cost less over time than PMI.

FHA loans: MIP is different from PMI

FHA loans require Mortgage Insurance Premium (MIP), not PMI — and the rules are less favourable. For FHA loans originated after June 2013 with less than 10% down, MIP is required for the life of the loan. The only way to remove it is to refinance into a conventional loan once you have 20% equity. This is an important consideration when deciding between FHA and conventional financing — the long-term MIP cost on an FHA loan can be substantial.

Frequently asked questions

Is PMI tax-deductible?
PMI deductibility has varied under US tax law and has not been consistently available in recent years. Check current IRS guidance or consult a tax advisor for the most current rules, as this changes with tax legislation.

Can I negotiate PMI rates?
PMI rates are set by the PMI company (not the lender) based on your loan characteristics. You cannot negotiate the rate directly, but you can shop lenders who work with different PMI providers — rates can vary slightly between providers. A higher credit score also qualifies you for lower PMI rates.

What if my home value drops below the purchase price?
If your home's current value is below the original purchase price, automatic PMI cancellation still occurs at 78% of the original value, not current value. However, requesting early cancellation based on current value would not work — lenders will not approve PMI cancellation if the current LTV exceeds 80%.

How to request PMI cancellation

Once you believe you have reached 20% equity based on the original purchase price, follow these steps:

1. Contact your loan servicer in writing and request PMI cancellation
2. Confirm your loan balance — servicers must provide this on request
3. Verify your payment history is clean (most servicers require 12 months of on-time payments)
4. The servicer may require a formal appraisal to confirm current value — typically $300–$600, which you pay
5. If approved, PMI is removed from your next billing cycle

Keep records of the request and any correspondence. By law, the servicer must respond to a written cancellation request within 30 days. If your servicer does not respond or incorrectly denies a valid request, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

Is a larger down payment always better?

Avoiding PMI by putting 20% down is financially logical — but only if it does not leave you without emergency savings or other essential financial cushions. Putting 20% down to avoid $150/month in PMI while depleting your emergency fund exposes you to the risk of needing to put that same type of expense on high-interest credit when something goes wrong. A 10% down payment with PMI and a healthy emergency fund is often a better financial position than 20% down with no liquidity. Run both scenarios through a mortgage calculator to compare the full cost picture.

PMI vs MIP: understanding the difference

A common source of confusion is the difference between PMI (for conventional loans) and MIP (Mortgage Insurance Premium, for FHA loans). Both add to your monthly payment when you put less than 20% down, but they work differently:

• PMI can be cancelled once you reach 20% equity — either automatically at 78% LTV or by request at 80% LTV. It is not permanent.
• MIP on FHA loans originated after June 2013 with less than 10% down is required for the life of the loan. The only way to remove it is to refinance into a conventional loan. At 10% or more down, MIP drops off after 11 years.

This distinction is important when choosing between FHA and conventional financing. If you are putting 5–10% down and expect to build equity within a few years, a conventional loan with PMI may cost less over time than an FHA loan with permanent MIP — even if the FHA rate is slightly lower. Run both scenarios through a mortgage calculator to compare total costs over your expected ownership period before deciding.

How long will you actually pay PMI?

The time it takes to reach 20% equity — and therefore eliminate PMI — depends on your down payment, loan rate, and home price appreciation. Here is what the timeline looks like for a $400,000 home with a 7% mortgage rate, under different down payment scenarios:

Home appreciation accelerates these timelines. If your home appreciates 5% per year, the 3% down buyer above might reach 20% equity in 4–5 years rather than 12 — and can request PMI cancellation based on current value with a new appraisal. This is why monitoring your home's market value and requesting reappraisal at the right time is financially worthwhile.

PMI as a feature, not just a cost

PMI is almost universally discussed as a cost to minimise or eliminate. But it is worth acknowledging what PMI actually enables: buying a home sooner, with less saved, without waiting years to accumulate a 20% down payment. For buyers in markets with rising home prices, the cost of PMI over 5–7 years may be significantly less than the additional appreciation captured by buying earlier rather than waiting to save 20%.

This is not an argument to dismiss PMI as a cost — it is a real, ongoing expense that should be eliminated as soon as possible. But framing it purely as a burden ignores the fact that it provided something valuable: access to homeownership earlier than would otherwise have been possible. Understanding PMI as a cost with a specific benefit — rather than just a fee — helps you make a more complete evaluation of whether a lower down payment today, with PMI, is better or worse than waiting to save more.