Short answer. Private mortgage insurance (PMI) is an insurance policy that protects the lender against borrower default on conventional mortgages with less than 20% down. PMI premiums typically cost 0.3%–1.5% of the loan balance annually.
PMI is required on most conventional mortgages where the borrower's down payment is less than 20% of the home's purchase price. It allows borrowers to enter homeownership with smaller down payments while compensating the lender for the higher risk.
How PMI works
The borrower pays a monthly premium added to their mortgage payment. The premium varies based on:
- Loan-to-value ratio (LTV): 95% LTV pays more than 90% LTV pays more than 85% LTV
- Credit score: 760+ pays significantly less than 620-680
- Mortgage type: 30-year fixed vs. 15-year vs. ARM
For a typical buyer with 720 FICO and 10% down, PMI runs roughly 0.5-0.7% of the loan balance annually — about $125-$175/month on a $300K mortgage.
PMI cancellation
Federal law (the Homeowners Protection Act of 1998) requires automatic PMI cancellation when the loan reaches 78% LTV based on the original purchase price. Borrowers can also request manual cancellation at 80% LTV, which often involves a new appraisal.
FHA mortgage insurance — the alternative
FHA loans require Mortgage Insurance Premium (MIP) — the FHA's equivalent of PMI. Unlike conventional PMI, FHA MIP runs for the life of the loan (no automatic cancellation). The 2024 FHA upfront MIP is 1.75% of the loan amount; the annual MIP is 0.55% on most FHA loans.
The economics
Many borrowers who qualify for both conventional and FHA loans choose conventional with PMI specifically because PMI cancels at 80% LTV, potentially saving tens of thousands of dollars over the life of the loan compared with FHA MIP that never cancels.
Sources
U.S. Census Bureau Survey of Construction; National Association of Realtors Existing Home Sales report; Freddie Mac Primary Mortgage Market Survey; National Bureau of Economic Research Business Cycle Dating Committee.