How PMI works and why it exists

Private mortgage insurance (PMI) is a policy the lender buys (or requires you to buy) that protects the lender if you default. It’s most common on conventional loans when your down payment is less than 20% of the home’s purchase price (or when your loan-to-value, LTV, is greater than 80%). PMI raises your monthly housing cost and adds to overall loan expense, but it does not protect the borrower.

Industry ranges for PMI premiums typically run from roughly 0.3% to 1.5% of the loan amount annually depending on your credit score, down payment/LTV and loan program; for a $300,000 loan, a 0.5% PMI premium equals about $125 per month ((0.005 × 300,000) ÷ 12). (Consumer Financial Protection Bureau: https://www.consumerfinance.gov/)

Why lenders require insurance: lenders use PMI to offset the higher risk of loans with small borrower equity. That makes it easier for borrowers who don’t have a large down payment to qualify for a mortgage — at a cost.

Mortgage insurance options that avoid monthly PMI

Here are the most common ways borrowers either avoid PMI entirely or replace monthly PMI with another structure:

  • 20% down payment on a conventional loan. The simplest way: make a down payment of at least 20% so the lender has enough equity cushion to waive PMI.

  • VA loans. Eligible veterans, active-duty service members and certain surviving spouses can get VA-guaranteed loans with no PMI requirement. (U.S. Department of Veterans Affairs: https://www.va.gov/)

  • USDA loans (rural). USDA loans don’t use PMI; instead they charge an upfront guarantee fee and an annual fee. The structure differs from PMI but can be cost-effective for eligible rural buyers. (U.S. Department of Agriculture: https://www.rd.usda.gov/)

  • Lender-paid mortgage insurance (LPMI). The lender pays the mortgage insurance in exchange for a higher interest rate or upfront fee. LPMI eliminates a separate monthly PMI charge, but it usually increases the interest rate for the life of the loan and may be harder to remove without refinancing. See our article on Lender-Paid Mortgage Insurance (LPMI).

  • Single-premium mortgage insurance (SPMI). You pay the MI in full at closing (or finance it into the loan) so you don’t have a monthly PMI payment. This can be cheaper over a short ownership horizon, but financed single-premium MI increases your loan balance.

  • Piggyback (second-lien) financing — 80/10/10 or 80/15/5 structures. A second mortgage can be used to bring the first mortgage’s LTV to 80% so the lender doesn’t require PMI. Be cautious: the second loan may have a higher rate, and you still carry two liens.

  • Homebuyer assistance, gifts, and down payment programs. Gifts from family or state/county down-payment assistance can raise your effective down payment so you avoid PMI or qualify for better terms.

  • Seller concessions or seller-paid MI in negotiations. In some markets sellers will pay closing costs or a single-premium MI as part of the deal, which reduces your upfront or monthly MI exposure.

Trade-offs: why avoiding PMI isn’t the only factor

Avoiding monthly PMI can save cash flow, but each alternative has trade-offs you must evaluate:

  • FHA loans: FHA loans simplify low-down-payment buying but don’t remove mortgage insurance. They use mortgage insurance premiums (MIP) that may be required for the life of the loan if your down payment is under 10% for loans with case numbers assigned on or after June 3, 2013; otherwise MIP typically lasts 11 years. (U.S. Department of Housing and Urban Development: https://www.hud.gov/)

  • VA loans: No PMI, but most borrowers pay a VA funding fee (unless exempt), which can be financed into the loan.

  • LPMI: Eliminates monthly PMI but generally raises your interest rate and reduces future options to remove the premium without refinancing.

  • Piggyback loans: Avoids PMI up front but adds complexity and potentially higher aggregate cost if the second lien carries a high rate.

  • Single-premium MI: Shifts the cost upfront. If you sell soon after purchase, you may pay more than if you had monthly PMI. If financed into the loan, it increases your principal and interest costs.

When you compare options, calculate total cost over the time you expect to own the home (not only monthly payment) and include likely refinance timing.

How and when PMI can be removed (conventional loans)

If you already have PMI on a conventional loan, you can typically remove it several ways:

  • Request cancellation at 80% LTV (based on the original amortization schedule). The Homeowners Protection Act (HPA) lets borrowers request cancellation at this threshold, provided you are current on payments and the property condition is acceptable. Lenders may require a small fee and an appraisal to confirm the current value. (Consumer Financial Protection Bureau: https://www.consumerfinance.gov/)

  • Automatic termination at 78% LTV. The lender must automatically terminate PMI when the unpaid principal balance reaches 78% of the original value (again, if payments are current). This is an important consumer protection under the HPA.

  • Early removal by appraisal. If your home value has risen, you may ask the lender for an appraisal to show current LTV is 80% or less; lenders can require you to cover the appraisal cost and to be current on mortgage payments.

  • Refinance. If rates and equity allow, refinance into a new loan without PMI, or into an LPMI structure if beneficial.

For FHA loans, mortgage insurance (MIP) follows FHA-specific rules and generally can’t be canceled the same way as PMI on conventional loans; check HUD guidance or consult your servicer for rules tied to your case number and origination date.

Practical examples

  • Example 1 — Conventional loan with PMI: You buy for $300,000 with a 5% down payment. Loan = $285,000. If PMI runs at 0.7% annually, PMI = $1,995/year or about $166/month. That’s real cashflow you could avoid if you put 20% down or use another strategy.

  • Example 2 — VA loan: Same buyer is a qualifying veteran and uses a VA loan. No PMI; instead they pay a one-time VA funding fee (unless exempt). Monthly housing cost is lower, but lifetime funding fees and possible higher interest rate or other terms should be weighed.

These simplified examples show why you should run numbers for your expected ownership period.

Practical checklist: choosing the right path

  1. Estimate how long you will keep the home. Short ownership favors paying a single premium or LPMI if it reduces monthly cash flow; long ownership favors building equity or refinancing.
  2. Compare total cost, not only monthly payment: include upfront fees, higher interest rate (LPMI), mortgage insurance duration (FHA MIP), and refinance costs.
  3. Get multiple lender quotes and ask for APR comparisons and PMI breakdowns.
  4. Consider negotiating seller concessions or a single-premium MI paid by the seller if your market supports it.
  5. Track your principal balance and home values; request PMI removal when LTV thresholds are met.
  6. Use our guide to Strategies to Remove Private Mortgage Insurance (PMI) Early for step-by-step timing and options.

Common misconceptions

  • “PMI protects me.” False — PMI protects the lender, not the borrower. (CFPB)
  • “FHA loans never have mortgage insurance.” False — FHA uses mortgage insurance premiums (MIP) and under many circumstances those premiums last longer than conventional PMI.
  • “Once I have PMI I’m stuck forever.” False — with conventional loans you can request removal at 80% LTV and it automatically ends at 78% LTV if you are current.

Related topics on FinHelp

Bottom line

PMI is a common cost for lower-down-payment buyers, but it’s avoidable or replaceable in many situations. The right option depends on your eligibility (VA, USDA), expected ownership horizon, cash-on-hand for down payment or single premiums, and tolerance for higher interest rates (LPMI). Run total-cost comparisons, get multiple lender quotes, and track your equity so you can remove PMI as soon as rules and numbers allow.

Professional disclaimer: This article is educational and not personalized financial advice. Rules and fees vary by loan program and over time; consult a mortgage professional, loan servicer, or HUD/VA guidance for actions you should take. (HUD: https://www.hud.gov/ | CFPB: https://www.consumerfinance.gov/ | VA: https://www.va.gov/)

Author note: In my 15+ years advising mortgage borrowers, I’ve seen many buyers save money by comparing the total cost of PMI alternatives rather than only focusing on the monthly payment. Small differences in interest rate or upfront premiums can change which option is cheapest for your situation.