Private mortgage insurance (PMI) is a type of mortgage insurance that usually applies on conventional loans when you put less than 20% down or, in some refinance cases, when you have less than 20% equity. Borrowers care about PMI because it can increase the monthly payment, make a smaller down payment possible, and affect how you compare one loan option to another.
PMI is a type of mortgage insurance usually required on a conventional loan when a homebuyer makes a down payment of less than 20% of the home’s value. On a refinance, PMI may also apply if the loan-to-value ratio is still above the level required for a conventional loan without mortgage insurance. In simple terms, loan-to-value compares the mortgage amount to the home’s value.
Private Mortgage Insurance protects the lender if the borrower defaults on the loan; it does not protect the homeowner’s equity, belongings, or ability to make payments. That is why PMI works differently from other insurance policies borrowers may be used to paying for.
While the basic borrower rule of thumb is “less than 20% down on a conventional loan often means PMI,” the exact requirements for coverage, removal, and valuation can also depend on legal standards, the loan servicer, and lender or investor guidelines.
PMI is associated with conventional mortgage loans, while FHA mortgage insurance is associated with FHA loans. That distinction matters when you compare loan options, because the insurance cost structure is not the same even when the down payment is similar.
More broadly, other government-backed loan programs may use different insurance or guarantee-fee structures rather than conventional PMI. For borrowers, the key takeaway is to avoid assuming that all mortgage insurance works the same way. If you are comparing conventional and FHA financing, make sure you look at the full payment, upfront costs, and long-term removal rules rather than the loan type name alone.
Unlike other types of insurance that you pay to protect your own interest in an asset, PMI is paid to protect the lender’s interest in the property. There are three primary ways PMI can be structured for borrowers on a conventional loan.
The most common form is monthly PMI, which adds a recurring premium on top of your normal Principal, Interest, Tax, and Insurance payment. PMI can also be paid upfront if the borrower pays a lump sum fee at closing instead of a monthly charge. Another option is lender-paid PMI, where the lender covers the mortgage insurance cost in exchange for a higher interest rate.
| PMI option | Who pays | How it affects payment or rate | When it may make sense | Main tradeoff |
|---|---|---|---|---|
| Monthly borrower-paid PMI | The borrower pays it each month | Adds a separate monthly mortgage insurance cost to the payment | Useful when you want to keep upfront closing costs lower | Higher monthly payment until PMI is removed |
| Single-premium or upfront PMI | The borrower pays a lump sum at closing | Reduces or avoids an ongoing monthly PMI charge | May fit borrowers who have extra cash available at closing | Higher upfront cost |
| Lender-paid PMI | The lender pays the insurance premium | Usually comes with a higher interest rate instead of a separate monthly PMI line item | May appeal to borrowers focused on simplifying the monthly payment structure | You may pay more through the rate over time |
PMI removal is easiest to understand when you separate automatic cancellation from borrower-requested removal.
Once you pay down your mortgage to 78% of the original purchase price or appraised value, whichever is less, and you have paid PMI for at least two years, your PMI must be cancelled. The Homeowners Protection Act requires that loans made after 1999 include notifications to the borrower when you arrive at this point in your payments.
A borrower may also request that PMI be removed earlier in some cases. Whether that happens can depend on factors such as payment history, seasoning, and whether the review is based on the property’s original value or current value. In some situations, the servicer may need a property valuation as part of that review.
That is why homeowners should not assume that a home value increase automatically means immediate PMI removal. Practical next steps are to contact your loan servicer if you think you have reached the required threshold, and to speak with your loan officer if you are comparing loan options and want to understand how PMI may end under each scenario.
When determining which form of PMI is best for your situation, there are many factors to consider. Contact us today to review which option fits your situation best.
Sammamish Mortgage can help. We serve clients across Washington, Idaho, Colorado, Oregon, and California. Since 1992, we’ve been providing several mortgage programs and products with flexible qualification criteria to borrowers across the Pacific Northwest. Visit our website to get an instant rate quote or to use our online mortgage calculator. Or, reach out to us if you are ready to get pre-approved for a mortgage.
Private mortgage insurance, or PMI, is a type of mortgage insurance that usually applies to conventional loans when a borrower puts less than 20% down or, in some refinance situations, has less than 20% equity. PMI protects the lender if the borrower defaults on the loan.
PMI is usually required on a conventional loan when the down payment is less than 20% of the home’s value. On a refinance, it may also apply when the loan-to-value ratio is still above the level required for a conventional loan without mortgage insurance.
PMI protects the lender, not the borrower. It does not protect the homeowner’s equity, personal belongings, or ability to make mortgage payments.
The borrower typically pays PMI in one of three ways on a conventional loan: as a monthly premium, as an upfront lump sum at closing, or indirectly through lender-paid PMI, which usually comes with a higher interest rate.
Borrower-paid PMI is usually charged as a separate monthly premium or as an upfront cost paid at closing. Lender-paid PMI means the lender covers the mortgage insurance premium, but the borrower usually pays for that through a higher interest rate over time.
PMI cancellation is easiest to understand by separating automatic cancellation from borrower-request removal. The content states that once the mortgage reaches 78% of the original purchase price or appraised value, whichever is less, and PMI has been paid for at least two years, PMI must be cancelled.
A borrower may be able to request PMI removal earlier than automatic cancellation in some cases. Whether that happens can depend on payment history, seasoning, and whether the review uses the property’s original value or current value. A loan servicer may also require a property valuation as part of the review.
A home value increase does not automatically mean PMI will be removed right away. Early removal can depend on the servicer’s review, the valuation used, payment history, and seasoning requirements.
No. PMI is associated with conventional mortgage loans, while FHA mortgage insurance is associated with FHA loans. The cost structure and removal rules are not the same, so borrowers should compare the full payment, upfront costs, and long-term rules rather than assuming all mortgage insurance works alike.
No, PMI does not necessarily last for the full life of the loan. It may end through automatic cancellation when the required threshold is reached, or earlier in some cases if the borrower requests removal and meets the servicer’s requirements.
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