What is PMI? Private Mortgage Insurance Explained

Updated upon publication of this page.

Private Mortgage Insurance is a policy that protects your lender if you default on your mortgage. It is required by most conventional lenders when your down payment is less than 20 percent of the home's value. Despite the name, it does not protect you.

Plain-English explanation All four PMI forms Legal framework (HPA)

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The basics in one paragraph

If you buy a $400,000 home with $40,000 (10 percent) down, your loan-to-value ratio is 90 percent. Your lender takes on more risk than if you had put 20 percent down, so they require you to buy insurance that pays them if you stop making payments. This is PMI. It is sold by private insurance companies, costs 0.19 to 2.29 percent of your loan amount per year depending on your credit, and it drops off automatically once your loan balance reaches 78 percent of the home's original value.

Who pays PMI, who gets the money, and why

You, the borrower, pay the PMI premium every month as part of your mortgage payment. Your lender collects it and remits it to the private mortgage insurer (such as MGIC, Radian, Essent, Enact, Arch, or NMI). The insurer uses the pool of premiums to pay claims when any insured borrower defaults.

If you default, the insurer pays your lender a portion of the lender's losses. The insurer may then pursue you for the shortfall. PMI does not protect you from foreclosure, from the lender's legal process, or from a deficiency judgment. It only protects the lender.

When PMI is required

PMI is required on most conventional (non-government) loans whenever the down payment is below 20 percent. The requirement is set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that buy most conforming mortgages. A few mortgage products require PMI even above 80 percent LTV (certain condominium or investment loans), but these are exceptions.

Government-backed loans use different programs with the same purpose but different names.

FHA loans use Mortgage Insurance Premium (MIP), both upfront (1.75%) and annual (0.15% to 0.75%).
VA loans use a one-time funding fee (1.25% to 3.30%) and no monthly premium.
USDA loans use a 1% upfront guarantee fee and 0.35% annual guarantee fee.

Each is explained in detail on our methodology page.

How much PMI costs

PMI costs are driven primarily by your credit score and loan-to-value ratio. On a 30-year conventional loan with excellent credit (760+), you can expect 0.30% to 0.50% annual rate at 90-95% LTV. With fair credit (620-639), the same loan can cost 1.5% to 2.3% per year, a 4x to 6x difference. Our PMI rates by credit score page has the full tier table.

On a $350,000 loan, PMI runs roughly $90 to $200 per month at good credit and $300 to $600 per month at lower credit scores. Multiplied over the typical 5-10 years before PMI cancels, this can total $10,000 to $50,000.

Four forms of PMI

Borrower-Paid Monthly PMI (BPMI)

The default form. You pay a monthly premium with your mortgage payment until PMI cancels. Flexible, cancellable, and the only form that benefits from HPA automatic termination.

Single-Premium PMI (SPMI)

You (or the seller as a concession) pay one lump sum at closing instead of monthly premiums. Often cheaper if you stay in the home more than five years. Not refundable if you sell or refinance early.

Lender-Paid PMI (LPMI)

The lender pays PMI in exchange for charging you a higher mortgage rate (typically 0.25% to 0.75% higher for the life of the loan). You never see a PMI line item, but you pay through the higher rate. Not cancellable without refinancing. See our full LPMI vs BPMI comparison.

Split-Premium PMI

A hybrid: you pay a smaller upfront premium at closing (0.5% to 1.5% of loan) plus reduced monthly premiums. Useful if you want lower monthly payments without the full LPMI rate penalty.

How PMI gets removed

Under the Homeowners Protection Act of 1998, your lender must terminate PMI in one of three ways on most conventional loans.

Borrower-requested cancellation at 80% LTV. Once your loan balance reaches 80% of the original home value, you can submit a written request to cancel PMI. The lender must comply if you are current on payments and your home has not declined in value.
Automatic termination at 78% LTV. At 78% LTV based on your original amortization schedule, your lender must terminate PMI without a request from you.
Final midpoint termination. If PMI has not terminated under either rule above, it terminates automatically on the first day of the month after the amortization midpoint (month 181 for a 30-year loan).

These rules apply only to conventional PMI. FHA MIP has its own rules (and lasts the full loan term in many cases). See our step-by-step PMI removal guide.

How to avoid PMI

Five legitimate ways:

Put 20% down. The classic path.
Piggyback loan (80-10-10). Use a second mortgage to keep the first below 80%. See our piggyback calculator.
Lender-Paid PMI (LPMI). Trade a higher rate for no monthly PMI.
VA loan if you are eligible (no PMI).
USDA loan for rural properties (lower-cost guarantee fee instead).

Our how to avoid PMI guide walks through each option.

History and legal framework

Private mortgage insurance started in 1957 when the first modern U.S. private mortgage insurer (MGIC) opened. Before that, borrowers who could not reach 20% down generally used FHA loans. The private industry allowed higher-LTV conventional lending, expanding homeownership.

Abuses of PMI through the 1980s and 1990s (lenders not notifying borrowers when they could cancel, and continuing to charge PMI long after it should have ended) led Congress to pass the Homeowners Protection Act in 1998. The Act, codified at 12 U.S.C. § 4901, created the cancellation rules still in force today, with amendments made in subsequent years.

Frequently asked questions

Is PMI the same as homeowners insurance?

No. Homeowners insurance protects you against physical damage to the home (fire, theft, storm). PMI protects the lender against your default. The two are completely separate products with different purposes and coverage.

Is PMI tax deductible?

The federal PMI deduction was last available for tax year 2021 and has not been renewed. For most borrowers today, PMI is not currently deductible on federal returns. Some states may still allow deductions. Consult a tax professional.

Can I pay PMI as a lump sum instead?

Yes, this is called Single-Premium PMI (SPMI). You pay the full insurance cost upfront at closing. It often costs less than the stream of monthly premiums if you stay in the home more than five years, but you lose it if you refinance or sell early.

Does paying extra toward principal cancel PMI faster?

It can accelerate the 80% borrower-requested cancellation (you reach the threshold faster) but it does not accelerate the 78% automatic termination (which is tied to the original schedule). Combined with a request, extra payments can save thousands.

Does PMI build equity?

No. PMI is pure insurance expense. It does not pay down your loan balance, build equity, or benefit you in any way other than enabling the loan to exist in the first place.