Private Mortgage Insurance (PMI)
Private mortgage insurance protects lenders when borrowers make low down payments. Learn how PMI works and how to cancel it.
Definition
Private mortgage insurance (PMI) is a policy that protects lenders against losses if a borrower defaults on a conventional loan with a down payment of less than 20%. Borrowers pay PMI premiums monthly or in a lump sum as part of their mortgage payment. PMI enables lenders to offer loans with lower down payments but increases the borrower’s monthly cost. Borrowers can request cancellation of PMI when their loan‑to‑value ratio reaches 80% and it’s automatically terminated when it reaches 78%, provided payments are current. Refinancing or making extra payments can also accelerate PMI removal.
Why It Matters
PMI protects the lender, you pay for it, and it is the rare housing cost you can cancel without selling or refinancing. Reach 80 percent of the original purchase price and you can request removal in writing; at 78 percent it terminates automatically. Homeowners who never ask often keep paying $200 a month for years past the point they qualified to stop.
Examples
Five percent down on a $520,000 home brings $221 a month in PMI. After four years of payments plus a $15,000 lump sum, the balance reaches 80 percent and the charge comes off.
A homeowner in a neighborhood that appreciated 30 percent pays $600 for an appraisal, documents 25 percent equity, and the servicer cancels PMI on current value under its own guidelines.
An FHA borrower who put 3.5 percent down discovers the mortgage insurance lasts the life of the loan and refinances into a conventional loan at 80 percent LTV to get rid of it.
Tips
Send the cancellation request in writing and note the date. Automatic termination at 78 percent runs off the original amortization schedule and ignores every extra payment you made.
Find out what your servicer requires for a value-based cancellation. Usually it is two years of on-time payments, 25 percent equity, and a broker price opinion they order themselves.
Compare single-premium PMI paid at closing against the monthly version over your expected holding period. Paying once often wins past about four years, but none of it comes back if you sell early.
Related Terms
Down Payment
A down payment is the upfront portion of a home’s purchase price. Learn why down payments reduce loa...
FHA Loan
An FHA loan is a government-backed mortgage with low down payment requirements. Learn eligibility cr...
Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio compares the loan amount to the property’s value. Learn why LTV matter...
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