Private Mortgage Insurance

Private Mortgage Insurance (PMI) is the cost of going below 20% down on a conforming loan. For loan balances above the conforming limit (the “Jumbo” tier most readers of this book end up in), PMI is typically not the operative constraint — see section “Jumbo Loan Microstructure” for the underwriting reality that replaces it. If you are buying within conforming limits with a small down payment, the rest of this subsection applies directly.

PMI is a type of insurance that lenders require from homebuyers who obtain conventional loans with a down payment of less than 20% of the home’s purchase price. PMI protects the lender in case the borrower defaults on the loan. It allows buyers who can’t or won’t make large down payments to secure mortgage financing at affordable rates. PMI is common in “high-ratio” loans, where the loan-to-value (LTV) ratio exceeds 80%. It helps lenders recover costs from foreclosed property resales, including accrued interest, taxes, and insurance paid before resale.

Purpose

PMI mitigates the risk for lenders when borrowers have less equity in the property. If you default, the insurance compensates the lender for losses.

Cost

PMI typically costs between 0.3% to 1.5% of the original loan amount per year, priced off your LTV and credit score. On a $700,000 conforming loan that is $2,100 to $10,500 annually. (The example is deliberately inside the conforming envelope; above it you are in Jumbo territory and PMI is not the mechanism — see section “Jumbo Loan Microstructure”.)

Payment Methods

PMI can be paid monthly, as a one-time upfront premium, or a combination of both. Monthly payments are the most common.

While PMI can increase monthly payments, it enables homeownership sooner, which can be beneficial in appreciating markets. Avoiding PMI can save you significant money over the life of your loan. Few options:

20% Down Payment

The most straightforward way to avoid PMI is to make a down payment of at least 20% of the home’s purchase price. This demonstrates sufficient equity and reduces the lender’s risk.

Piggyback Loans

Also known as an 80-10-10 loan, this involves taking out a second mortgage to cover part of the down payment. This structure typically includes: a 10 percent down payment, 80 percent main mortgage, and a 10 percent “piggyback” second mortgage. In this scenario, you still borrow 90% of the home’s value, but the main mortgage covers only 80%. The second mortgage usually carries a higher, often adjustable, interest rate. These loans help you avoid PMI but come with risks and costs, such as higher interest rates on the second mortgage. Refinancing can be trickier because the second mortgage lender must agree to the refinance unless you can pay off the second mortgage with the new loan. The piggyback structure was common during the mortgage boom in the early to mid-2000s. CFPB provides guidance on this approach.

Lender-Paid Mortgage Insurance (LPMI)

Some lenders offer LPMI, where they pay the PMI in exchange for a slightly higher interest rate on the loan. This can be beneficial if you plan to stay in the home for a shorter period, as the higher interest rate may cost less over time than monthly PMI payments.

VA Loans

If you’re a veteran, you may qualify for a VA loan, which doesn’t require PMI regardless of the down payment amount. This is a significant benefit for eligible borrowers.

Refinancing

Once you have at least 20% equity in your home, you can refinance your mortgage to eliminate PMI. Do this only if the new rate is also better; on a conforming loan the current-value cancellation route below sheds PMI without touching the note.

The Homeowners Protection Act of 1998 (HPA or PMI Cancellation Act) was signed into law on July 29, 1998, and became effective on July 29, 1999. It was amended on December 27, 2000, for technical corrections and clarification. The Act addresses homeowners’ difficulties in canceling PMI coverage. It establishes provisions for canceling and terminating PMI, sets disclosure and notification requirements, and mandates the return of unearned premiums.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 granted the CFPB the authority to supervise and enforce compliance with the Homeowners Protection Act for entities within its jurisdiction.

You have four separate exits — three under the HPA and one under the agencies’ servicing guides — and servicers will volunteer exactly one of them:

Borrower-requested cancellation at 80%

You can request cancellation once the principal balance reaches 80% of the home’s original value — either by the amortization schedule or by making extra principal payments to get there early. The request must be in writing, you must be current, and the servicer may require an appraisal showing no decline in value and no junior liens. The earliest scheduled date is printed on the PMI disclosure form you received at closing; if you can’t find it, ask the servicer for it.

Automatic termination at 78%

The servicer must terminate PMI on its own, no request required, on the date the balance is scheduled to reach 78% of original value — provided you are current on that date. This is scheduled-balance based, so prepayments do not accelerate it; that is what the 80% request is for.

Final termination at the amortization midpoint

If neither trigger has fired — which happens on loans that were modified or that fell behind — PMI must end at the midpoint of the amortization schedule (year 15 of a 30-year loan), so long as you are current.

Cancellation on current value, outside the HPA

The statute measures against original value; the agencies’ servicing rules measure against today’s. On a Fannie Mae or Freddie Mac loan you can request cancellation on a new appraisal once the balance is at or below 80% of current value after five years of seasoning, or 75% between two and five years, with no refinance and no new loan costs. In an appreciating market this is the exit most conforming borrowers actually use, and the one to ask for before paying for a refinance to shed PMI.

None of this applies to FHA mortgage insurance premiums, which are a different animal on a different statute: on most FHA loans originated with less than 10% down, the annual MIP runs for the life of the loan and the only exit is refinancing out of FHA entirely. That single fact usually decides the FHA-versus-conventional question for anyone who can clear conventional underwriting.

PMI became deductible again in 2026 — and it will not help you. OBBBA (Sec. 70108) permanently treats mortgage insurance premiums as qualified residence interest under IRC §163(h)(3)(E), “Interest”, effective for amounts paid in tax years beginning after 2025, reviving a deduction that had lapsed after 2021. Before you get excited: the deduction phases out by 10% for each $1,000 of AGI above $100,000 ($500 if married filing separately) and is gone entirely at $110,000. If you are reading this book, you are past the phase-out by an order of magnitude. Note it, and move on.

For more detailed information, refer to the CFPB guidelines on PMI.