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PMI and Mortgage Insurance Explained

Private mortgage insurance (PMI) is required on conventional loans when the borrower puts less than 20% down, protecting the lender against default. FHA, VA, and USDA loans impose their own insurance or guarantee fees with different cost structures and cancellation rules. Understanding the differences in mortgage insurance across programs is critical for comparing true loan costs.

Key Takeaways

  • PMI on conventional loans is required when the down payment is less than 20% and protects the lender, not the borrower.
  • Conventional PMI can be canceled at 80% LTV by borrower request and is automatically terminated at 78% LTV under the Homeowners Protection Act.
  • FHA loans charge both an upfront MIP (1.75%) and annual MIP (typically 0.55%), with annual MIP required for the life of the loan when down payment is less than 10% .
  • VA loans charge a one-time funding fee (1.25%-3.3%) instead of monthly mortgage insurance, with exemptions for disabled veterans .
  • USDA loans charge an upfront guarantee fee (1.0%) and annual fee (0.35%), which is lower than FHA MIP .
  • PMI cost varies significantly based on credit score and LTV ratio — borrowers with lower credit scores at high LTV pay substantially higher premiums.
  • Lender-paid mortgage insurance (LPMI) eliminates the monthly PMI payment but embeds the cost in a permanently higher interest rate that cannot be removed without refinancing.

How It Works

How PMI Cancellation Works Under the Homeowners Protection Act

The Homeowners Protection Act of 1998 establishes two mechanisms for PMI removal on conventional loans. The first is borrower-initiated cancellation: when the borrower’s loan balance reaches 80% of the original value (based on the original amortization schedule and the lesser of purchase price or original appraised value), the borrower may submit a written request to the lender to cancel PMI. The lender must cancel PMI if the borrower is current on payments, has a good payment history (no 30-day late payments within the prior 12 months and no 60-day late payments within the prior 24 months), and certifies that there are no subordinate liens on the property. The second mechanism is automatic termination: the lender must automatically terminate PMI when the loan balance reaches 78% of the original value based on the original amortization schedule, regardless of whether the borrower requests it. This automatic termination applies even if the borrower has not contacted the lender. If the borrower is not current on payments at the time automatic termination would occur, the lender must terminate PMI as soon as the borrower becomes current.

How FHA MIP Is Calculated and Applied

FHA MIP consists of two components. The upfront MIP (UFMIP) of 1.75% is calculated on the base loan amount and is almost always financed into the loan, increasing the total loan balance. For a $300,000 FHA loan, the UFMIP is $5,250, bringing the total loan amount to $305,250. The annual MIP is calculated on the outstanding loan balance each year. At an annual rate of 0.55% on a $305,250 balance, the first year’s MIP is approximately $1,679, or about $140 per month. As the loan balance decreases through amortization, the monthly MIP payment decreases slightly each year. However, because the annual MIP is required for the life of the loan (for borrowers who put less than 10% down), the total MIP cost over a 30-year term is substantial — often exceeding $40,000 on a $300,000 loan . This ongoing cost is why many FHA borrowers refinance into conventional loans once they have sufficient equity and credit scores to qualify.

How Lender-Paid Mortgage Insurance Differs from Borrower-Paid

With borrower-paid monthly PMI (BPMI), the borrower pays a separate monthly premium that appears as a line item on the mortgage statement. This premium is cancelable under HPA rules. With lender-paid mortgage insurance (LPMI), the lender pays the PMI premium to the insurance company and compensates by charging the borrower a higher interest rate. The rate increase is permanent for the life of the loan — it does not decrease when the borrower reaches 20% equity. The advantage of LPMI is a lower monthly payment in the near term (no separate PMI line item), and the higher interest may be tax-deductible as mortgage interest (unlike PMI premiums, whose deductibility is uncertain). The disadvantage is that the borrower pays the equivalent of mortgage insurance for the entire loan term unless they refinance. LPMI is most suitable for borrowers who expect to refinance within a few years or who benefit more from the potential tax deduction on a higher interest rate than from a lower rate with a non-deductible PMI premium.

Requesting Early PMI Cancellation Based on Home Value Appreciation

Some lenders and servicers allow borrowers to request PMI cancellation before the original amortization schedule reaches 80% LTV, provided the borrower can demonstrate through a new appraisal that the home’s current value results in an LTV of 80% or less. This path is not guaranteed by the HPA (which uses original value) but is permitted by many servicers as a matter of policy. Typically, the borrower must have made at least 24 monthly payments (some servicers require 24 to 60 months of seasoning) , be current on the mortgage with no late payments, and pay for a new appraisal ordered through the servicer (not a borrower-obtained appraisal). If the new appraisal supports an LTV of 80% or less, the servicer cancels the PMI. If the appraisal does not support cancellation, the borrower loses the cost of the appraisal with no refund. Borrowers considering this path should request the servicer’s specific requirements before ordering the appraisal.

Comparing Total Mortgage Insurance Costs Across Programs

When comparing loan programs, the total cost of mortgage insurance over the expected hold period is more informative than the monthly premium alone. A conventional loan at 95% LTV with PMI of 0.65% per year may appear more expensive monthly than an FHA loan with annual MIP of 0.55%, but the conventional PMI can be canceled after a few years while the FHA MIP persists for the life of the loan. Over a 10-year hold period, the conventional borrower who cancels PMI in year 5 pays significantly less total insurance cost than the FHA borrower. Conversely, for a borrower with a lower credit score who pays conventional PMI at 1.0% or higher, FHA’s flat 0.55% rate may be the lower total cost even accounting for the life-of-loan duration. Running a side-by-side comparison that accounts for upfront costs, monthly premiums, cancellation timing, and interest rate differences is the most reliable way to identify the least expensive option.

Related topics include conventional loans explained, fha loans explained, fha vs conventional loans: a complete comparison, down payment requirements by loan type, and loan limits by county and program.

Key Factors

Factors relevant to PMI and Mortgage Insurance Explained
Factor Description Typical Range
Loan-to-Value Ratio (LTV) Higher LTV ratios result in higher PMI premiums on conventional loans. The 80% LTV threshold is the dividing line for whether PMI is required at all. PMI required above 80% LTV; rates increase at 85%, 90%, and 95% LTV tiers
Credit Score PMI providers use the borrower's credit score as a primary pricing factor. Lower scores result in significantly higher premiums. 760+ scores receive lowest rates; 680 and below pay 2-3x higher premiums at the same LTV
PMI Payment Structure The method of paying PMI (monthly, lender-paid, single premium, split premium) affects both the monthly cost and the total cost over the life of the loan. Monthly BPMI is most common; LPMI adds 0.125%-0.375% to the interest rate
Loan Program FHA, VA, and USDA each impose their own insurance/fee structures with different rates, upfront costs, and cancellation rules independent of conventional PMI. FHA annual MIP 0.55%; USDA annual fee 0.35%; VA funding fee 1.25%-3.3% one-time
Expected Hold Period How long the borrower plans to keep the loan affects which insurance structure is most cost-effective. Short hold periods favor LPMI or single premium; long hold periods favor cancelable BPMI. Breakeven analysis typically favors BPMI for hold periods over 5-7 years when PMI can be canceled

Examples

Conventional PMI Cancellation at 80% LTV

Scenario: A borrower purchased a home for $400,000 with 10% down ($40,000), resulting in a $360,000 loan at 90% LTV. The borrower pays monthly PMI of $125/month. After 4 years of payments and principal reduction, the remaining balance reaches $320,000 (80% of the $400,000 original value). The borrower submits a written request to cancel PMI.
Outcome: The servicer verifies the borrower has no late payments in the prior 12 months and no subordinate liens. PMI is canceled, saving the borrower $125/month ($1,500/year) for the remaining loan term. If the borrower had not requested cancellation, automatic termination would have occurred when the balance reached $312,000 (78% of $400,000), which might take an additional year or more of payments.

FHA MIP vs. Conventional PMI Total Cost Comparison

Scenario: A borrower with a 660 credit score is purchasing a $300,000 home with 3.5% down. The FHA option charges 1.75% UFMIP ($5,250 financed) plus annual MIP of 0.55% for the life of the loan. A conventional option at 96.5% LTV charges PMI at approximately 1.10% per year due to the lower credit score, cancelable when the borrower reaches 80% LTV.
Outcome: The FHA monthly MIP starts at approximately $140/month. The conventional PMI starts at approximately $275/month. Over the first 5 years, the conventional borrower pays significantly more per month but can cancel PMI once reaching 80% LTV. The FHA borrower pays less per month but cannot cancel MIP. Over a 30-year term, the FHA borrower pays roughly $50,000+ in total MIP versus approximately $16,000 in total conventional PMI if canceled in year 7 . For this borrower, the conventional option may be cheaper long-term despite the higher initial monthly cost — but only if the borrower's credit score qualifies for the conventional loan.

Veteran Comparing VA Funding Fee to Conventional PMI

Scenario: A veteran with a 740 credit score is purchasing a $350,000 home. The VA loan requires zero down but charges a 2.15% funding fee ($7,525, financed). A conventional loan with 5% down ($17,500) charges PMI at 0.40% per year ($1,400/year). The veteran wants to determine the least expensive path over a 7-year hold period.
Outcome: The VA loan has no monthly mortgage insurance, but the financed funding fee increases the loan balance and monthly payment. Over 7 years, the total funding fee cost (including interest on the financed amount) is approximately $8,500 . The conventional loan's total PMI cost over 7 years is approximately $9,800 (assuming cancellation has not yet occurred at 80% LTV), plus the $17,500 down payment represents an opportunity cost. The VA loan preserves the veteran's cash for other investments while producing a similar total insurance cost, making it potentially the more favorable option depending on the veteran's financial priorities.

Common Mistakes to Avoid

  • Assuming mortgage insurance protects the borrower or their equity

    Mortgage insurance protects the lender against financial loss if the borrower defaults. If the borrower is foreclosed upon, the mortgage insurance company reimburses the lender for losses, but the borrower receives no benefit. The borrower still loses the property, damages their credit, and may owe a deficiency balance. This distinction matters because borrowers sometimes believe they are purchasing protection for themselves, when they are actually paying for the lender's risk mitigation.

  • Not requesting PMI cancellation on a conventional loan after reaching 80% LTV

    Automatic PMI termination occurs at 78% LTV, not 80%. The two-percentage-point gap means borrowers who do not proactively request cancellation at 80% may pay several additional months of unnecessary PMI. Borrowers should track their loan balance against the 80% threshold and submit a written cancellation request as soon as the balance qualifies. Many borrowers are unaware of their right to request early cancellation.

  • Choosing lender-paid mortgage insurance without understanding the long-term cost implications

    LPMI eliminates the monthly PMI payment but permanently increases the interest rate. Unlike borrower-paid PMI, the higher rate does not disappear when the borrower reaches 20% equity. Borrowers who plan to stay in the home long-term may pay significantly more in total interest with LPMI than they would have paid in borrower-paid PMI that was canceled after a few years. LPMI is most appropriate for shorter hold periods where the borrower plans to refinance or sell before the cumulative cost of the higher rate exceeds the cumulative cost of monthly PMI.

  • Failing to compare total mortgage insurance costs across loan programs before selecting a program

    Borrowers often compare only the monthly payment without considering the upfront costs, cancellation timelines, and total cost over the expected hold period. An FHA loan may have a lower monthly MIP than a conventional PMI premium for a borrower with a lower credit score, but the life-of-loan FHA MIP can far exceed the total cost of cancelable conventional PMI over time. A complete comparison requires modeling the total insurance cost over the expected hold period for each program.

Documents You May Need

  • PMI disclosure form provided by the lender at origination showing the premium rate, monthly cost, and cancellation terms
  • Written request letter to the servicer for PMI cancellation at 80% LTV (for borrower-initiated cancellation)
  • Current mortgage statement showing the outstanding loan balance relative to the original property value
  • New appraisal ordered through the servicer if requesting early cancellation based on home value appreciation
  • FHA loan amortization schedule showing when the 11-year MIP cancellation threshold is reached (for borrowers who put 10%+ down)

Frequently Asked Questions

Can I avoid PMI on a conventional loan without putting 20% down?
Yes, through lender-paid mortgage insurance (LPMI), where the lender pays the PMI in exchange for a higher interest rate, or through a piggyback loan structure (such as an 80-10-10, where a second mortgage covers 10% and the borrower puts 10% down, keeping the first mortgage at 80% LTV). Both approaches eliminate the monthly PMI payment but carry their own costs. LPMI results in a permanently higher rate, and a piggyback second mortgage has its own interest rate and payment. These alternatives should be compared against standard BPMI on a total-cost basis.
How long does it take to remove PMI from a conventional loan?
The timeline depends on the original LTV and the loan's amortization schedule. A borrower who put 10% down on a 30-year fixed loan will typically reach 80% LTV through scheduled payments in approximately 8 to 10 years, depending on the interest rate. A borrower who put 5% down may need 10 to 14 years of scheduled payments. Extra principal payments accelerate the timeline. Borrowers who benefit from significant home appreciation may be able to request early cancellation based on a new appraisal, potentially in as few as 2 years if the servicer's policy permits it .
Why does FHA charge mortgage insurance for the life of the loan?
FHA implemented the life-of-loan MIP requirement in 2013 for loans with original LTV above 90% to strengthen the FHA insurance fund's financial position after significant losses during the 2008 housing crisis . Prior to this change, FHA MIP could be canceled once the borrower reached 78% LTV with at least 5 years of payments. The current policy generates sustained revenue for the FHA fund but increases the long-term cost for borrowers who maintain FHA loans for extended periods.
Is the VA funding fee the same as mortgage insurance?
The VA funding fee is not mortgage insurance, but it serves a similar function: it offsets the cost to the government of guaranteeing VA loans. Unlike PMI or FHA MIP, the funding fee is a one-time charge (not a recurring monthly payment) and is paid at closing or financed into the loan. VA borrowers do not pay any monthly mortgage insurance premium, which is a significant long-term cost advantage compared to FHA and conventional loans with PMI.
Is PMI tax deductible?
The tax deductibility of PMI premiums has been available intermittently as a federal tax provision that Congress has extended on a year-by-year basis. When available, the deduction applies as an itemized deduction and phases out for borrowers with adjusted gross income above certain thresholds. The deduction has lapsed and been reinstated multiple times. Borrowers should check the current tax year's rules and consult a tax professional to determine eligibility .
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