What Is Private Mortgage Insurance and How to Remove It

Your monthly mortgage payment includes more than principal and interest. For many buyers who put less than 20 percent down, it also includes private mortgage insurance, a line item that can add hundreds of dollars to your housing costs every year. Understanding what this charge actually does, why lenders require it, and the precise steps that eliminate it can save you thousands of dollars over the life of your loan. This guide walks through the mechanics of PMI, the federal rules that govern its cancellation, and the practical moves that get it removed sooner.

What Private Mortgage Insurance Actually Is

Private mortgage insurance, commonly called PMI, is a policy that protects your mortgage lender, not you, if you stop making payments and the home ends up in foreclosure. When a buyer makes a down payment below 20 percent of the purchase price, the lender carries extra risk because the loan balance sits close to the property value. If home prices dip or the borrower defaults, the lender may not recover the full amount owed through a sale. PMI bridges that gap by reimbursing the lender for a portion of its losses.

The cost typically ranges from 0.3 percent to 1.5 percent of the original loan amount per year, depending on your credit score, down payment size, and loan type. On a 300,000 dollar loan, that translates to roughly 900 to 4,500 dollars annually, or 75 to 375 dollars per month. Lenders usually fold the premium into your monthly payment, which is why many first-time buyers do not immediately notice how much they are paying. For a deeper look at the mechanics behind these premiums, see this overview of private mortgage insurance policies.

It helps to separate PMI from other insurance products that sound similar. Mortgage insurance comes in several forms, and each has different rules, costs, and cancellation paths.

• Borrower-paid PMI: The most common form, paid monthly by the homeowner on conventional loans with down payments under 20 percent.
• Lender-paid PMI: The lender covers the premium upfront but recoups the cost through a higher interest rate, so you pay indirectly.
• FHA mortgage insurance premium: Required on Federal Housing Administration loans, this comes as an upfront fee plus an annual premium that often lasts the life of the loan.
• VA funding fee: A one-time charge on Department of Veterans Affairs loans that functions differently from ongoing PMI and can sometimes be waived.
• USDA guarantee fee: Applied to Department of Agriculture rural loans, structured as an upfront and annual fee similar to FHA insurance.

The distinction matters because the removal rules differ sharply. Conventional PMI is cancellable under federal law, while FHA mortgage insurance generally cannot be removed without refinancing into a different loan program. If you are comparing loan options and trying to decide which path minimizes long-term costs, the type of mortgage insurance attached to each program should factor into your decision.

Why Lenders Require PMI and Who Pays It

Lenders operate on risk. A borrower with a 5 percent down payment has very little equity, which means the lender absorbs most of the downside if the loan goes bad. PMI transfers part of that risk to an insurer, letting the lender approve loans it would otherwise deny. Without PMI, millions of buyers who cannot save a full 20 percent down payment would be locked out of homeownership entirely. The trade-off is that the borrower pays for the lender's protection.

Federal law sets the ground rules. The Homeowners Protection Act of 1998 requires lenders to automatically terminate PMI on most conventional loans once the loan balance reaches 78 percent of the original home value, based on the original amortization schedule. Borrowers can also request cancellation once the balance hits 80 percent. These rights apply to borrower-paid PMI on primary residences. Investment properties, second homes, and certain high-risk loan types fall outside some of these protections, so it pays to read your loan documents carefully.

PMI is not the same as a down payment assistance program or a grant. It is a recurring cost, and it stays on your loan until you take action or hit the automatic termination threshold. That is why borrowers who plan to stay in their homes for several years should map out exactly when their PMI will drop off and whether they can accelerate that timeline.

How to Remove PMI From Your Mortgage

Removing PMI is rarely automatic in the early years of a loan. You usually have to request it, document your home value, and satisfy your servicer's requirements. The process varies depending on whether you are relying on your original amortization schedule or on a higher appraised value. The steps below cover the standard path for conventional loans.

1. Check your loan balance and equity position. Pull your latest statement and confirm how much you still owe. Compare that figure to your original purchase price to estimate your loan-to-value ratio.
2. Review your mortgage documents. Look for the PMI disclosure section, which spells out your cancellation rights, the automatic termination date, and any special conditions attached to your loan.
3. Contact your loan servicer. Ask for the exact procedure to request PMI cancellation, including any required forms, fees, or appraisal standards. Servicers often have a specific department that handles these requests.
4. Order an appraisal if needed. If you are using current market value rather than the original purchase price, the servicer will typically require a new appraisal, and you usually pay for it.
5. Submit your request in writing. Follow up by phone to confirm receipt and ask for a timeline. Keep copies of every document you send.

Once your loan-to-value ratio reaches 80 percent based on the original value, you can request cancellation. At 78 percent, the servicer must automatically terminate PMI on most conforming loans, provided your payments are current. If you have made significant improvements or your local market has appreciated, a new appraisal may show that you have already crossed the 80 percent threshold even though your loan balance has not fallen that far.

Timing matters here. If you are close to the 80 percent mark, waiting a few months may let you avoid the cost of an appraisal. If your home value has risen sharply, acting sooner could save you more in premiums than the appraisal costs. Running the numbers both ways before you call your servicer is a smart first move, and a mortgage rate comparison tool can help you see whether refinancing might eliminate PMI even faster.

When Refinancing Beats Waiting

For some homeowners, the fastest route to eliminating PMI is not cancellation but refinancing. If your home has appreciated since you bought it, or if you have paid down the balance aggressively, a new loan at 80 percent loan-to-value or lower removes the PMI requirement entirely. Refinancing can also lower your interest rate, shorten your term, or switch you from an adjustable-rate loan to a fixed-rate product. The trade-off is closing costs, which typically run 2 to 5 percent of the loan amount, plus a fresh round of underwriting and paperwork.

Refinancing makes the most sense when you can accomplish two goals at once. For example, if you can drop your rate by half a percentage point and eliminate a 150 dollar monthly PMI premium, the combined savings may recoup your closing costs within a couple of years. On the other hand, if rates have risen since you bought your home, a refinance might not pencil out even with the PMI savings. Comparing your current loan terms against available offers gives you a clear picture before you commit.

FHA borrowers face a different situation. FHA mortgage insurance premiums generally cannot be cancelled the way conventional PMI can. The only way to remove them is to refinance into a conventional loan once you have enough equity, which is why many FHA borrowers watch their loan-to-value ratio closely and plan a refinance as soon as they cross the 20 percent equity mark. VA borrowers, by contrast, often avoid ongoing mortgage insurance altogether, though the one-time funding fee still applies in most cases.

Requirements, Costs, and Common Pitfalls

Cancelling PMI is not as simple as making a phone call. Servicers impose conditions, and missing a single requirement can delay your request by months. Knowing what to expect upfront saves frustration and keeps the process moving.

• Payment history: You generally need a clean record with no late payments in the past 12 months, and some servicers look back 24 months.
• Appraisal requirements: If you use current value, the servicer may require an appraisal from an approved professional, and the value must meet specific criteria.
• Loan type restrictions: PMI cancellation rights apply mainly to conventional loans on primary residences. Investment properties and second homes often have different rules.
• Seasoning requirements: Some loans require a minimum period, often two to five years, before you can request cancellation based on current value.
• Written request: Verbal requests rarely suffice. Most servicers require a signed letter or a specific form before they will act.

One of the most common mistakes is assuming the servicer will handle everything automatically. Automatic termination only kicks in at 78 percent loan-to-value based on the original amortization schedule, and even then it depends on your account being current. If you are using a higher appraised value to justify cancellation at 80 percent, you must initiate the request yourself. Another frequent pitfall is ordering an appraisal before confirming the servicer's specific requirements. Some lenders accept automated valuation models or broker price opinions instead of a full appraisal, which can save you several hundred dollars.

Finally, keep in mind that PMI is not the same as homeowners insurance, property taxes, or HOA dues. Those expenses continue regardless of your equity position. Cancelling PMI reduces your monthly payment, but it does not eliminate the other costs of ownership. Reviewing your full escrow breakdown before and after cancellation helps you confirm that the premium has actually been removed and that your payment reflects the change.

Private mortgage insurance exists to make low-down-payment loans possible, but it is not meant to last forever. Whether you reach the cancellation threshold through regular payments, a rising market, or a strategic refinance, the savings can be substantial. Start by reviewing your loan documents, confirm your current loan-to-value ratio, and map out the fastest realistic path to removing PMI. A few hours of research and a well-timed request can put hundreds of dollars back in your pocket every year.