What PMI Actually Insures
Private Mortgage Insurance is an insurance policy that protects the lender: not you, if you stop making your mortgage payments and they have to foreclose. Because the insurance reduces the lender's risk on low-down-payment loans, they're willing to extend financing they otherwise couldn't.
PMI is required on conventional loans when your down payment is less than 20% of the purchase price (loan-to-value above 80%). It's typically added to your monthly mortgage payment, though some lenders offer single-premium PMI paid up front at closing.
How Much PMI Costs
PMI premiums vary based on your credit score, your loan-to-value ratio, and the loan amount. Expect monthly PMI of roughly 0.3%–1.5% of the loan amount per year, divided into monthly installments. On a $500,000 loan at 0.6%, that's about $250 per month.
Higher credit scores get significantly lower PMI rates, sometimes half of what a borrower with a lower score would pay. If you're between credit tiers, even a small score bump can save you thousands over the years you carry the insurance.
How to Remove PMI
Federal law (the Homeowners Protection Act) gives you three ways to drop PMI on a conventional loan:
1. Request cancellation at 80% LTV. Once your loan balance reaches 80% of the original purchase price, you can request cancellation in writing. The lender may require a current appraisal to confirm your home's value hasn't dropped.
2. Automatic termination at 78% LTV. Once your loan balance reaches 78% of the original purchase price (based on the original amortization schedule), the servicer must automatically cancel PMI without any request from you. You must be current on payments.
3. Mid-point termination. If you haven't hit 78% by the loan's halfway point, the servicer must cancel PMI then. Mostly relevant for adjustable-rate or interest-only loans where the balance doesn't drop as fast.
If your home has appreciated significantly, you can also request early PMI removal based on current market value, typically by paying for a new appraisal. Many California homeowners drop PMI within 2-3 years just from appreciation alone.
FHA Mortgage Insurance Is Different
FHA loans use a separate program called Mortgage Insurance Premium (MIP). It has two parts: an upfront MIP of 1.75% of the loan amount paid at closing (or rolled into the loan), and an annual MIP of 0.45-1.05% paid monthly.
Critically, FHA MIP is not automatically cancellable on most loans originated after June 3, 2013. If you put less than 10% down on an FHA loan, MIP stays for the life of the loan. The only way to get rid of it is to refinance into a conventional loan once your equity supports it (typically 80% LTV).
Strategies to Avoid PMI Entirely
20% down. The classic move. If you have the cash, putting down 20% means no PMI from day one.
Piggyback loan (80/10/10). Take an 80% first mortgage plus a 10% second mortgage (HELOC or fixed second) and put 10% down. The first stays at 80% LTV, so no PMI, though you're paying interest on the second.
Lender-paid PMI. The lender pays your PMI in exchange for charging you a slightly higher interest rate. Useful if you'll keep the loan for the long term or if interest is tax-deductible.
VA loan. No down payment required, no PMI, ever. Available to veterans, active-duty service members, and certain surviving spouses.
Doctor / professional loans. Specialty programs that allow 0-5% down without PMI for certain professionals (physicians, dentists, attorneys). Limited lender availability.
Is PMI Worth It?
For many buyers, especially in California where saving 20% can take a decade, PMI is the cost of entering the housing market sooner. If your home appreciates 5% per year, PMI for 2-3 years often costs less than the lost appreciation from waiting to save more.
Run the math: estimated PMI cost × number of months you'll carry it, versus expected appreciation × purchase price × years of delayed purchase. In most California markets over most time horizons, the math favors buying with PMI.