What Is PMI? Private Mortgage Insurance Definition

Private mortgage insurance (PMI) is insurance that protects the lender — not you — when a down payment is below 20%. It typically costs 0.3% to 1.5% of the loan amount per year, so a $300,000 loan pays roughly $900 to $4,500 annually, collected monthly on top of principal, interest, tax and insurance.

PMI buys you a house sooner. The question is whether the monthly cost is worth the years of waiting it saves.

How to actually cancel PMI

The three routes below are the legal ones. What catches people is that reaching the right number and then waiting for the servicer to notice is a different process, and it is the part that costs money when it stalls.

1. Pay until 78% LTV, then do nothing. If the loan amortises down on its own, cancellation at 78% is the servicer's job under the Homeowners Protection Act, not yours to request. It can take a few months after the balance crosses the line, and the premium is usually refunded for the period after cancellation. Watch for the refund on your next statement; if it does not arrive, ask for it in writing.
2. Request cancellation at 80% LTV. A written request puts the ball in the servicer's court and starts a clock. Expect to supply evidence: a statement showing the current balance, proof you are current on payments, and sometimes a new appraisal. Lenders may also want confirmation that no second liens have been placed on the property.
3. Refinance once the appraisal clears 80%. This is the route that appeals when the home has appreciated faster than the loan has amortised, because the automatic rule is measured against the original value while a refinance is measured against the current one. You need qualifying credit and enough equity to absorb closing costs, so it is not available to everyone who is overpaying.

Two things are worth checking before you do any of this. First, whether a cancellation fee or a strict appraisal requirement is buried in your own mortgage paperwork — the fee is legal and it is usually the largest single line item people miss. Second, whether a lender offers a lower LTV in exchange for a smaller down payment, which sometimes costs less than the PMI ever did.

What PMI costs and how it is priced

PMI premiums scale with risk: the lower the down payment and the lower the credit score, the higher the rate. A borrower with 10% down and excellent credit might pay 0.3–0.5%; the same loan with 5% down and fair credit can exceed 1.2%. On a $300,000 loan the range is roughly $900 to $3,600 a year.

PMI is not uniform across the market. On conventional loans it is usually a monthly premium or a single upfront payment; some lenders offer lender-paid PMI, which is not free — the cost is folded into a higher interest rate for the life of the loan, and it is rarely removable without refinancing.

The practical comparison: a 10% down loan with $150/month of PMI versus waiting two more years to save 20% down. If home prices rise 4% a year, the wait can cost more in price appreciation than PMI costs in premiums — which is why the decision depends on your specific market, not a rule of thumb.

Three ways PMI ends

1. Automatic termination at 78% LTV. Under the Homeowners Protection Act, the servicer must cancel PMI automatically once the balance reaches 78% of the original value, provided you are current on payments. This is a legal requirement, not a favour.

2. Borrower-requested cancellation at 80% LTV. You can ask for removal once the balance hits 80% of the original value. Some lenders require a current appraisal; most require a good payment history and no second liens.

3. Refinancing after appreciation. If the home's value has risen, a new appraisal may put you below 80% LTV even with the same loan balance. Refinancing at that point removes PMI — and is often the fastest route for buyers who put down 5–10% into a rising market.

Note the difference in denominator: the automatic rule uses the original value, while refinancing can use the current appraised value. That distinction is why many borrowers pay PMI years longer than necessary.