Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) is insurance that protects the lender against loss if a borrower defaults on a conventional mortgage with less than 20% down payment. PMI is paid by the borrower and can be removed once sufficient equity is established.
What This Means
When PMI Is Required
Conventional mortgage lenders require PMI when the borrower's down payment is less than 20% of the home's purchase price, resulting in a loan-to-value (LTV) ratio above 80% . PMI is not required on government-backed loans such as FHA, VA, or USDA, which have their own mortgage insurance structures. The requirement applies to both purchase and refinance transactions where the LTV exceeds the threshold.
Cost Structure and Payment Options
PMI premiums typically range from 0.2% to 2.0% of the original loan amount per year , depending on the borrower's credit score, LTV ratio, and loan type. Payment structures include:
- Monthly premiums added to the mortgage payment
- Single upfront premium paid at closing (may be financed into the loan)
- Lender-paid PMI (LPMI) absorbed by the lender in exchange for a higher interest rate
- Split premiums combining an upfront portion with reduced monthly payments
Cancellation and Removal
Under the Homeowners Protection Act (HPA) of 1998, borrowers can request PMI cancellation when their LTV reaches 80% based on the original property value . Servicers must automatically terminate PMI when the LTV reaches 78% based on the original amortization schedule . These provisions apply to borrower-paid PMI on loans originated after July 29, 1999. Lender-paid PMI cannot be cancelled; the only way to eliminate it is through refinancing.