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PMI explained: when it costs you and when to drop it

· 6 min read

What PMI actually is

Private mortgage insurance protects the lender — not you — against default on a loan with less than 20% down. You pay the premium; the lender is the beneficiary. Premiums are usually added to your monthly payment and disappear automatically once you have built enough equity.

How it is priced

PMI premiums depend on three factors:

  1. Loan-to-value (LTV) ratio: 95% LTV pays much more than 90% LTV.
  2. Credit score: a 760 score pays roughly half what a 660 score pays.
  3. Loan term: longer loans = slightly higher PMI rate.

A typical band: a 700 score with a 95% LTV 30-year loan pays around 0.55%/yr. On a $400,000 loan that’s about $183/month.

  1. Automatic termination at 78% LTV. Required by the federal Homeowners Protection Act of 1998. You don’t have to ask.
  2. Borrower-requested cancellation at 80% LTV. You can request it once you reach 80% based on the original purchase price, if your loan is current.
  3. Refinance into a no-PMI loan. If your home value has appreciated enough that current LTV is below 80%, refinancing eliminates PMI immediately.

When PMI is worth paying

PMI is annoying but it is not automatically a bad deal. If waiting to save another 10% would mean paying $50,000 more for the same house in two years, the math often favors buying now and accepting PMI.

Use our calculator to see your PMI auto-drop date and total PMI cost over the life of the loan.

Frequently asked questions

What is the key takeaway about PMI explained?

PMI is private mortgage insurance, charged when your down payment is less than 20% of the home price. It typically costs 0.3% to 1.5% of the loan balance per year. Under the federal Homeowners Protection Act, lenders must auto-cancel borrower-paid PMI when the loan balance reaches 78% of the original home value, assuming you are current on payments.

mtgcalculator Editorial

Independent editorial group focused on plain-English mortgage math, transparent assumptions, and original tooling. Articles are reviewed monthly for accuracy. Reach us at [email protected].

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