Private mortgage insurance — PMI — is one of the most misunderstood mortgage costs. Many buyers avoid putting less than 20% down specifically to avoid PMI, not realizing that: (a) PMI is often cheaper than keeping cash tied up in a down payment, and (b) PMI is removable once you reach sufficient equity. Here's everything you need to know.
What Is PMI?
PMI is insurance that protects the lender (not you) against loss if you default on your loan. Lenders require it when your down payment is less than 20% — because loans with less equity have statistically higher default rates.
PMI is a monthly premium added to your mortgage payment until you reach 20% equity in the home.
Key distinction: PMI (conventional loans) vs. MIP (FHA loans) — these are different products with different removal rules. This guide focuses on conventional PMI. FHA MIP has its own rules (see below).
Who Pays PMI?
If you take a conventional loan with less than 20% down, you'll pay PMI. No exceptions on standard conventional financing. The rate depends on:
- Your loan-to-value ratio (LTV) — lower LTV = cheaper PMI
- Your credit score — higher score = cheaper PMI
- Whether PMI is paid monthly, upfront, or as lender-paid (built into rate)
PMI Cost Range (2026)
| Credit Score | LTV 90–95% | LTV 85–90% | LTV 80–85% |
|---|---|---|---|
| 760+ | 0.20–0.35% | 0.15–0.25% | 0.10–0.18% |
| 720–759 | 0.30–0.50% | 0.22–0.38% | 0.15–0.25% |
| 680–719 | 0.45–0.70% | 0.32–0.55% | 0.22–0.35% |
| 640–679 | 0.70–1.00% | 0.52–0.78% | 0.38–0.55% |
Dollar impact on $450,000 loan at 95% LTV (5% down), 740 credit score:
- PMI at 0.40%: $450,000 × 0.40% / 12 = $150/month
At 680 credit score:
- PMI at 0.65%: $244/month
Types of PMI Payment Structures
Monthly PMI: Standard — added to each monthly payment, adjusts/cancels as LTV changes.
Upfront PMI: Pay a lump sum at closing to buy down or eliminate monthly PMI. Useful if you have extra cash but not a full 20% down payment.
Lender-Paid PMI (LPMI): Lender covers PMI cost in exchange for a slightly higher interest rate. You pay no separate PMI charge, but the rate is permanently higher. Best for buyers planning to sell or refinance within 5 years.
Split-premium PMI: Combination — partial upfront + reduced monthly. Less common.
How to Remove PMI
This is where conventional loans have a major advantage over FHA MIP.
Method 1: Automatic Cancellation (Homeowners Protection Act)
Federal law (the Homeowners Protection Act) requires lenders to automatically cancel PMI when your loan balance reaches 78% of the original purchase price based on your original amortization schedule — without you doing anything.
On a $450,000 loan at 5% down (original balance $427,500):
- 78% of $450,000 = $351,000
- Time to reach 78% through normal payments at 6.75%: approximately 11–12 years
This is the baseline. But you can accelerate it.
Method 2: Request Cancellation at 80% LTV
Once you reach 80% LTV (20% equity based on original purchase price), you can request PMI cancellation. The lender must honor this if:
- You're current on payments
- No second mortgages are on the property
- You can demonstrate the property value hasn't declined (lender may require an appraisal)
How to reach 80% faster:
- Make extra principal payments each month
- Make one extra payment per year (converts a 30-year to ~24-year payoff; reaches 80% LTV faster)
- Make a lump-sum payment (tax refund, bonus) applied to principal
Method 3: Appreciation-Based Refinance or Appraisal
If your home has appreciated significantly, you may reach 80% LTV of the current value well before 20% equity based on purchase price. Two paths:
New appraisal request (mid-loan): Federal law allows borrowers to request PMI cancellation based on current value after 24 months, if the loan balance is 75% or less of current appraised value (after 2 years of payments) or 80% if you're in the 2–5 year range and there have been documented improvements. You pay for the appraisal (~$500–$700). Refinance: If you refinance into a new loan at 80% LTV or below, PMI drops automatically. Popular when rates fall and you're close to 80% LTV — you eliminate PMI and lower your rate simultaneously. PMI vs. FHA MIP: Key Differences FeatureConventional PMIFHA MIPCancellable?Yes — at 80% LTVDepends on down paymentWhen cancels80% LTV request / 78% auto11 years (10%+ down) or loan life (<10% down)Upfront premiumOptional1.75% mandatoryAnnual cost0.20–1.00% of loan0.55% of loan (most cases) The FHA trap: If you put less than 10% down on an FHA loan originated after June 2013, MIP lasts for the entire loan life. The only way to remove it is to refinance into a conventional loan once you have 20% equity. This is one of the most common reasons FHA borrowers refinance after 5–7 years — to eliminate MIP. Is Avoiding PMI Worth It? The conventional wisdom of "put 20% down to avoid PMI" doesn't always pencil out. Consider: Buyer has $90,000 saved. Home costs $450,000.
Option A: Put 20% down ($90,000), no PMI Option B: Put 5% down ($22,500), keep $67,500 invested
Option B's PMI cost: ~$150/month
Option B's invested $67,500 at 7% average annual return: grows by $4,725/year (~$394/month in growth) The $394/month investment return far exceeds the $150/month PMI cost — meaning Option B builds more total wealth, even after paying PMI, than Option A in most scenarios. PMI is not always the enemy. It's the cost of access to homeownership and investment appreciation with less cash tied up. FAQ Can I deduct PMI on my taxes? PMI deductibility has come and gone legislatively. As of 2026, verify current tax law with your CPA — it has not been a permanent deduction. Does PMI protect me? No — PMI protects your lender. If you default, PMI pays the lender, not you. What if I disagree with my lender's appraisal for PMI removal? You can hire an independent appraiser for a second opinion, but lenders aren't required to accept it. If you believe the lender's appraisal is low, a refinance with a new lender's appraisal may be your cleaner path. Questions About PMI on Your Loan? 📞 970-708-9624 | tj@taytoncapitalllc.com Get Pre-Approved → | Contact Tayton Capital
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