Private mortgage insurance, or PMI, quietly adds $100 to $200 to the average homeowner’s monthly payment, according to data from Freddie Mac and the Consumer Financial Protection Bureau. For buyers who put down less than 20%, it can feel like an unavoidable price of homeownership.
But PMI doesn’t have to stick around like an unwanted guest. In many cases, homeowners can drop it sooner than they realize. Knowing how it works and when to act can potentially save thousands of dollars over the life of a loan. Let’s get started.
Understanding Private Mortgage Insurance
PMI is required on most conventional loans when a buyer puts down less than 20% of the home’s purchase price. It protects the lender, not the borrower, if the loan goes into default.
Annual PMI premiums typically range from 0.3% to 1.5% of the original loan amount, according to the Consumer Financial Protection Bureau. On a $350,000 mortgage, that can translate to roughly $1,050 to $5,250 per year, or about $87 to $437 per month. Most homeowners fall toward the lower end of that range, but even $150 per month can add up quickly to about $1,800 per year.
The exact cost depends on factors like credit score, down payment size, loan type, and whether the premium is paid monthly or upfront. While PMI makes homeownership accessible with smaller down payments, it also adds to the overall cost of the loan.
When PMI Is Required and When It Must End
For conventional loans, federal law provides built-in protections. Under the Homeowners Protection Act, lenders must automatically terminate PMI once the loan balance reaches 78% of the home’s original value, as long as payments are current. In many cases, however, borrowers can request removal even sooner, typically when the balance reaches 80%, according to Freddie Mac.
While PMI is not permanent, many homeowners hold onto it longer than necessary because they don’t actively request cancellation after reaching the 80% threshold.
3 Ways to Eliminate PMI
1. Reach 20% equity and request cancellation.
The most direct way to eliminate PMI is to build equity until the loan balance reaches 80% of the home’s original value and formally request removal. Making extra principal payments can help speed up that timeline. Homeowners should take the following steps: contact their loan servicer, confirm eligibility requirements, and ensure their payment history is in good standing.
2. Refinance after home values rise.
If property values increase, refinancing into a new conventional loan may eliminate PMI if the new loan balance is below 80% of the updated appraised value. According to Fannie Mae, rising home equity has allowed many borrowers to drop PMI sooner than expected in appreciating markets. However, refinancing only makes sense if closing costs and the new interest rate line up with long-term savings.
3. Use a piggyback loan structure.
Some buyers avoid PMI from the start by using an 80-10-10 structure. This involves taking out a primary mortgage for 80% of the purchase price, a second loan for 10%, and putting 10% down. Because the primary mortgage stays at an 80% loan-to-value ratio, PMI is not required. While this can eliminate monthly PMI payments, borrowers should compare the interest rate and terms on the second loan carefully to ensure the math works in their favor.
Alternatives That Do Not Require PMI
Government-backed loans are unique, so they follow different rules. VA loans, available to eligible service members and veterans, do not require PMI, according to the Department of Veterans Affairs. USDA loans also do not require traditional PMI, though they include guarantee fees that are structured differently.
FHA loans require mortgage insurance premiums instead of PMI, and those premiums may last for the life of the loan unless refinanced into a conventional mortgage. Buyers should look at the total cost structure and not get caught up solely in whether PMI is required.
The Long Term Cost of Waiting
Paying $150 per month in PMI for five years totals $9,000. Over seven years, that figure can exceed $12,000. While PMI can be a practical bridge into homeownership, it should not be ignored once equity builds.
Homeowners who monitor their loan balance, track local property values, and understand their cancellation rights are often able to remove PMI earlier than scheduled. A quick call to the loan servicer and a review of the amortization schedule can reveal whether those savings are within reach.
For many households, eliminating PMI is one of the simplest ways to lower a mortgage payment without moving or restructuring the entire loan. The key is knowing when the numbers work and acting at the right time.
