Conventional Loans And Mortgage Insurance
Private mortgage insurance (PMI) is insurance that protects the lender, not you, if you stop paying a conventional loan. It is generally required when your down payment is less than 20%. Unlike FHA mortgage insurance, PMI can be removed: you can request it at 80% of the original value, and it ends automatically at 78%.
Key Takeaways
- PMI is generally required on a conventional loan with less than 20% down.
- Cost varies with your credit score and down payment, typically roughly 0.3% to 1.5% of the loan per year.
- Borrower-paid PMI can be requested for removal at 80% loan-to-original-value, ends automatically at 78% of the scheduled balance, and is finally terminated at the midpoint of the loan term.
- Lender-paid PMI is built into your rate and generally cannot be cancelled without refinancing.
What is PMI and why do lenders require it?
A lender takes more risk when you borrow most of a home’s value. PMI offsets that risk. You pay the premium, but the insurance protects the lender. It lets lenders approve borrowers with 3% to 19% down, which opens homeownership to many people who have not saved a full 20%. The detailed guide is at what is PMI on a conventional loan.
What does PMI cost?
PMI is quoted as a percentage of the loan amount per year and paid monthly. For most borrowers it ranges roughly from 0.3% to 1.5% of the loan per year. Two things drive the price:
- Credit score. Higher scores get lower PMI.
- Down payment. The more you put down, the lower the PMI.
Loan term, occupancy and the type of coverage also matter. Ask for a quote early, since PMI can change your best loan choice. Compare with FHA mortgage insurance.
What are the ways to pay PMI?
| Option | How it works | Trade-off |
|---|---|---|
| Borrower-paid monthly (BPMI) | A monthly premium added to your payment | No upfront cost in most cases, and it can come off when you reach the equity thresholds |
| Single-premium | You pay the cost in one payment, often at closing | Lower monthly payment, but you do not get money back if you sell or refinance early |
| Lender-paid (LPMI) | The lender pays the premium and charges a higher interest rate | Lower payment that is not tied to your equity, but the higher rate stays until you refinance |
Lender-paid PMI can look attractive because the payment may be lower at first. It is usually not cheaper over a long hold, since the higher rate continues even after you reach 20% equity. It makes the most sense when you expect to sell or refinance within a few years. Because it is built into the rate, LPMI cannot be cancelled.
How and when can I remove PMI?
Federal law, the Homeowners Protection Act, sets the rules for borrower-paid PMI.
- At 80%: you can ask. When your balance reaches 80% of the original value, you can request removal in writing. You generally need a good payment history, no subordinate liens, and the home may need an appraisal to confirm it has not lost value.
- At 78%: it ends automatically. When your scheduled balance reaches 78% of the original value, PMI terminates if you are current on your payments.
- At the midpoint: final termination. If you are current, PMI ends no later than the midpoint of the loan term, which is the 15-year mark on a 30-year loan.
Many servicers also let you remove PMI sooner if your home has gone up in value and you can show 20% equity on a new appraisal. They may require a minimum holding period. Check your servicer’s rules.
- Down payment: $85,000. Original loan: $765,000.
- 80% of $850,000 is $680,000. Once your balance reaches $680,000, you can request PMI removal.
- 78% of $850,000 is $663,000. At a scheduled balance of $663,000, PMI ends automatically.
- At an example PMI cost of 0.5% per year, PMI is $3,825 per year, which is $318.75 per month. Across the full 0.3% to 1.5% range, it would be roughly $191 to $956 per month on this loan.
Your actual premium depends on your credit score and your loan terms.
Can I get rid of PMI faster?
- Make extra principal payments. This moves you toward 80% sooner.
- Use a higher down payment. Even a few more percentage points reduce PMI cost, and 20% avoids it entirely.
- Request removal after appreciation. If values in your area have risen, a new appraisal may show you are past 20% equity.
- Refinance. If you have a lender-paid PMI rate, or cannot remove PMI otherwise, a rate-and-term refinance can eliminate it once equity is 20% or more. Weigh the closing costs. See conventional loan refinance.
Is there a way to avoid PMI altogether?
Yes. Put 20% down, or use a structure that lowers the first loan below 80% of the price. Some buyers use a separate second loan. Whether that costs less than PMI depends on rates and terms at the time, so we compare both for you. Learn more in conventional loan down payment options, and see the benefits and the cons of conventional loans, or go back to the Conventional Loans hub.
At Lendia, we price PMI before you commit
At Lendia, we compare options from multiple lenders, including monthly, single-premium and lender-paid PMI, so you can see which structure fits how long you plan to keep the loan. Contact us or get a rate quote now.
Frequently Asked Questions
Does PMI go away automatically?
Borrower-paid PMI ends automatically when your scheduled balance reaches 78% of the original value, if you are current. It ends no later than the midpoint of the loan term regardless.
Is PMI tax deductible?
Tax treatment can change and depends on your situation. Ask a tax professional.
Is PMI the same as homeowners insurance?
No. Homeowners insurance protects your home and belongings. PMI protects the lender.
Can I cancel lender-paid PMI?
Not directly, because the cost is part of your rate. A refinance is the usual way to remove it.
How do I request PMI removal?
Contact your loan servicer, ask for their PMI removal requirements, and submit a written request. They may require an appraisal and proof of payment history.
Does FHA mortgage insurance work the same way?
No. FHA mortgage insurance lasts for the life of the loan if you put down less than 10%, and 11 years if you put down 10% or more.
Talk to a Licensed Lendia California Loan Officer
At Lendia, we review your situation and show you the programs you qualify for.