PMI explained: when it drops off

Private mortgage insurance — PMI — is an extra monthly cost that catches many first-time buyers by surprise. If your down payment is less than 20% of the home price, your lender will almost certainly require it. PMI protects the lender, not you, yet you pay the premium. The good news: PMI is temporary. Federal law and lender guidelines specify exactly when you can remove it. This guide explains what PMI costs, why lenders require it, and the steps to eliminate it as soon as you qualify.

What is PMI?

Private mortgage insurance is a policy that compensates the lender if you default on your mortgage. It applies to conventional loans — not FHA loans, which use a different insurance called MIP (mortgage insurance premium).^[1] PMI does not protect you from foreclosure or cover your payments if you lose your job. It exists solely because lenders view low-down-payment loans as higher risk.

PMI typically costs 0.5% to 1.5% of the original loan amount per year, paid monthly as part of your mortgage payment. On a $300,000 loan, that is roughly $125 to $375 per month — real money that does not build equity or reduce your principal. Fannie Mae guidelines govern how PMI is structured on most conventional loans sold to the secondary market.^[5]

When is PMI required?

PMI is required on conventional mortgages when your down payment is below 20% of the purchase price. If you put 5% down on a $350,000 home, you start with 5% equity and 95% loan-to-value (LTV) — well above the 80% LTV threshold where PMI is not required. Lenders add PMI to your monthly payment automatically at closing.

Some borrowers consider a “piggyback” second mortgage (an 80-10-10 loan) to avoid PMI, but second mortgages often carry higher rates and their own risks. For most buyers, accepting PMI and removing it as soon as possible is simpler and cheaper. The home affordability calculator can estimate PMI in your monthly housing payment when your down payment is below 20%.

PMI vs. FHA mortgage insurance

FHA loans require an upfront and annual mortgage insurance premium regardless of down payment size. FHA MIP on loans with less than 10% down lasts for the life of the loan in many cases — it does not automatically cancel at 78% LTV the way conventional PMI does.^[4] If you have an FHA loan and later reach 20% equity, refinancing to a conventional loan is often the only way to eliminate mortgage insurance.

This distinction matters when choosing your loan type. A conventional loan with PMI that you can remove may cost less over time than an FHA loan with permanent MIP, even if the FHA down payment requirement is lower. See our refinance guide if you are considering switching from FHA to conventional.

When PMI drops off automatically

The Homeowners Protection Act requires lenders to automatically terminate PMI when your loan balance reaches 78% of the original home value — as long as you are current on payments.^[3] On a 30-year loan with a typical payment schedule, this happens around year 10 to 12, depending on your rate and whether you make extra payments.

The CFPB confirms that automatic termination occurs at 78% of the original value, not the current market value.^[2] You do not need to request it — the lender must cancel PMI once you hit that threshold, provided you have not missed payments.

How to remove PMI sooner

You do not have to wait for automatic termination. Under the Homeowners Protection Act, you can request PMI cancellation once your loan balance reaches 80% of the original home value — typically around year 7 on a standard amortization schedule, or sooner if you make extra payments.^[2]

Make extra principal payments. Extra payments accelerate the point where you reach 80% LTV. The extra mortgage payment calculator shows how additional monthly or one-time payments shorten your timeline and reduce total interest — including the months of PMI you eliminate.

Request cancellation at 80% LTV. Contact your servicer in writing when your balance hits 80% of the original purchase price. You may need to show a history of on-time payments and demonstrate that the home has not declined in value.

Get a new appraisal. If your home has appreciated significantly, you may reach 80% LTV based on current market value even if your balance has not dropped that far. An appraisal proving 20% equity can support an early PMI removal request, though lender requirements vary.

How PMI fits into your monthly payment

PMI sits alongside principal, interest, property taxes, and homeowners insurance in your total housing payment. Our mortgage payment guide breaks down each PITI component. Use the mortgage payment calculator to see how PMI affects your monthly cost at different down payment levels.

When budgeting for a home, include PMI in your affordability calculation — not just principal and interest. A home that looks affordable without PMI may stretch your budget once the premium is added. The how much house can I afford guide walks through setting a realistic housing budget that accounts for all costs.^[6]

Planning around PMI from the start

If you can save a 20% down payment without depleting your emergency fund, you avoid PMI entirely. If 20% is out of reach, treat PMI as a temporary cost with a defined exit strategy: know your target LTV, make extra payments when possible, and set a calendar reminder to request cancellation at 80%.

PMI should not discourage homeownership — many buyers successfully use it as a bridge to ownership while building equity. But understanding when it ends and actively working toward removal can save thousands of dollars over the life of your loan.

Quick answers

How much does PMI typically cost per month? PMI generally runs 0.5% to 1.5% of the loan amount annually. On a $350,000 loan, that is $1,750 to $5,250 per year — roughly $146 to $438 per month added to your housing payment. The exact rate depends on your down payment percentage, loan term, loan type, and credit score. A borrower with excellent credit and a 15% down payment pays less than one with a 5% down payment and average credit.

Is PMI tax-deductible? PMI deductibility has varied with legislation and has not been permanently established in the tax code. Congress has periodically extended a deduction for mortgage insurance premiums as an itemized deduction, but it has also expired. Check the current year’s IRS guidance or consult a tax professional — do not assume deductibility when budgeting for PMI costs.

Does making extra payments help eliminate PMI faster? Yes. Extra mortgage payments reduce your principal balance faster, which accelerates your path to 80% LTV. Even modest monthly extra payments — $100 to $200 beyond the standard payment — can shorten the PMI period by months or years depending on your loan balance and rate. Use the extra mortgage payment calculator to model how quickly additional payments reduce your balance toward the 80% threshold.

What is lender-paid PMI? Lender-paid PMI (LPMI) is an arrangement where the lender covers the PMI premium in exchange for a higher interest rate on your loan. This can simplify your monthly payment and may be tax-advantageous if you itemize, since mortgage interest is deductible while PMI deductibility is uncertain. The tradeoff is that the higher rate applies for the life of the loan — unlike borrower-paid PMI, which cancels at 80% LTV. LPMI makes most sense when you plan to stay in the home long-term and can accept the permanent rate adjustment.