What is PMI (Private Mortgage Insurance)?

Private Mortgage Insurance (PMI) is insurance that protects the lender — not the borrower — against financial loss if the borrower defaults on a conventional mortgage loan. PMI is typically required when the borrower makes a down payment of less than 20% of the home's purchase price, resulting in a loan-to-value (LTV) ratio above 80%. PMI costs generally range from 0.5% to 1.5% of the original loan amount per year, though the exact rate depends on the borrower's credit score, down payment percentage, and loan type.

PMI can be paid as a monthly premium added to the mortgage payment, as an upfront lump sum at closing, or as a combination of both. Under the Homeowners Protection Act (HPA) of 1998, lenders must automatically cancel PMI when the borrower's LTV reaches 78% of the original purchase price through scheduled payments. Borrowers can request cancellation when they reach 80% LTV, but the lender may require an appraisal to confirm the home's value.

It is important to distinguish PMI from FHA mortgage insurance premium (MIP). MIP is required on all FHA loans regardless of down payment amount and includes both an upfront premium (1.75% of the loan amount) and an annual premium. For FHA loans with less than 10% down, MIP lasts the life of the loan; for 10% or more down, MIP can be removed after 11 years.

VA loans do not require mortgage insurance but charge a one-time funding fee.