PMI Insurance Explained: What It Is, How It Works, and How to Remove It

Buying a home does not always require a 20% down payment. Many buyers purchase homes with considerably less, but a smaller down payment may come with an additional expense known as private mortgage insurance, commonly called PMI. Learn what PMI Insurance is, how it works, when it’s required, how much it costs, and practical ways homebuyers can remove Private Mortgage Insurance sooner.

Understanding PMI can help you compare mortgage options, estimate your complete monthly payment, and make a more informed homebuying decision. It can also help current homeowners recognize when they may be eligible to request that PMI be removed.

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What Is Private Mortgage Insurance?

Private mortgage insurance is a type of mortgage insurance that may be required when a buyer obtains a conventional mortgage and makes a down payment of less than 20% of the home’s purchase price.

Although the borrower normally pays for PMI, the insurance protects the mortgage lender rather than the homeowner. If the borrower stops making payments and the lender experiences a loss, PMI may reimburse the lender for a portion of that loss.

PMI does not make mortgage payments for the homeowner, protect the homeowner’s credit, prevent foreclosure, or pay the mortgage balance on the homeowner’s behalf.

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When Is PMI Usually Required?

PMI is commonly associated with conventional loans when the mortgage exceeds 80% of the property’s value.

This percentage is known as the loan-to-value ratio, or LTV.

For example, suppose a buyer purchases a $300,000 home and makes a $30,000 down payment.

• Purchase price: $300,000
• Down payment: $30,000
• Mortgage amount: $270,000
• The loan-to-value ratio would be:
• $270,000 ÷ $300,000 = 90%

Because the loan represents 90% of the purchase price, the lender may require PMI.

PMI can also be required when refinancing a conventional mortgage if the homeowner has less than 20% equity in the property. Whether it is required ultimately depends on the loan program, lender, investor guidelines, property, and borrower’s financial qualifications.

How Much Does PMI Cost?

There is no single PMI rate that applies to every borrower. The premium may be influenced by several factors, including:

• The borrower’s credit profile
• The size of the down payment
• The mortgage amount
• The loan-to-value ratio
• The mortgage term
• The type of property
• Whether the home will be a primary residence, second home, or investment property
• The specific lender and mortgage insurance provider

Borrowers should request a complete Loan Estimate from each lender they are considering. This document can help them compare the estimated interest rate, mortgage insurance, closing costs, and total monthly payment among different loan options.

A lower advertised interest rate does not necessarily mean a loan will have the lowest overall cost. Mortgage insurance, lender fees, discount points, and other expenses should also be considered.

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How Is PMI Paid?

PMI can be structured in several ways.

Monthly borrower-paid PMI

This is one of the most common arrangements. The PMI premium is added to the borrower’s monthly mortgage payment.

Upfront PMI

Some borrowers may have the option to pay all or part of the mortgage insurance premium at closing.

Split-premium PMI

The borrower pays part of the premium upfront and the remainder through smaller monthly payments.

Lender-paid mortgage insurance

With lender-paid mortgage insurance, the lender pays the mortgage insurance premium but generally recovers the expense by charging the borrower a higher interest rate or otherwise adjusting the loan terms.

Lender-paid mortgage insurance may eliminate a separate monthly PMI charge, but the higher interest rate may remain for the life of the loan unless the borrower refinances. Buyers should compare the long-term cost rather than looking only at the initial monthly payment.

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PMI Is Not the Same as FHA Mortgage Insurance

The term PMI generally applies to private mortgage insurance connected with conventional mortgages.

FHA loans use mortgage insurance premiums, commonly called MIP. FHA mortgage insurance follows different rules and may include both an upfront premium and an annual premium paid through monthly mortgage payments.

Depending on the loan’s origination date, down payment, and terms, FHA mortgage insurance may remain in place for a specific number of years or for the life of the loan. It should not be assumed that FHA mortgage insurance can be removed under the same rules as conventional PMI.

VA and USDA loans also have their own funding fees, guarantee fees, eligibility standards, and mortgage-related costs. Buyers should ask a qualified lender to compare the complete costs of each available loan program.

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Can PMI Be Removed?

In many cases, borrower-paid PMI on an eligible conventional mortgage can eventually be removed.

Federal law provides cancellation and automatic-termination protections for many residential mortgages, but the rules do not apply identically to every loan. The homeowner’s payment history, loan documents, property value, loan classification, and servicer requirements may all affect the process.

Requesting PMI Cancellation at 80%

A borrower generally has the right to request cancellation when the mortgage balance is scheduled to reach 80% of the home’s original value.

The request normally must be made in writing. The homeowner may also need to:

• Have a satisfactory payment history
• Be current on the mortgage
• Certify that there are no subordinate liens on the property
• Provide evidence that the property’s value has not declined
• Meet other reasonable requirements established by the mortgage holder or servicer

For purposes of the federal cancellation rules, “original value” generally refers to the lower of the home’s purchase price or appraised value when the mortgage was originated. For a refinance, it generally means the appraised value used when the new mortgage was completed.

Homeowners should contact their mortgage servicer for the exact requirements that apply to their loan.

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Automatic PMI Termination at 78%

For many eligible conventional mortgages, borrower-paid PMI must terminate automatically when the loan is scheduled to reach 78% of the property’s original value, provided the borrower is current on the mortgage.

This is based on the scheduled amortization of the loan rather than the home’s current market value. Making additional principal payments may allow a homeowner to request cancellation earlier, but it does not necessarily change the date for automatic termination unless the loan is formally re-amortized.

The Midpoint Termination Rule

If PMI has not already been canceled or automatically terminated, federal law generally requires it to end by the first day of the month following the midpoint of the loan’s amortization period, as long as the borrower is current.

For a standard 30-year mortgage, the midpoint is generally reached after 15 years. This protection may be particularly relevant to loans whose balances decline slowly because of their payment structure.

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Can Rising Home Values Help Remove PMI Earlier?

Possibly, but appreciation-based PMI removal is not governed solely by the standard 80% and 78% original-value rules.

Some mortgage investors and servicers allow homeowners to request PMI removal based on the property’s current value. However, they may impose requirements involving:

• How long the loan has been in place
• The homeowner’s payment history
• The amount of equity required
• Whether improvements caused the increase in value
• The type of valuation or appraisal that must be completed
• Who selects the appraiser or valuation provider

The homeowner may be required to pay for an appraisal, broker price opinion, or another approved valuation. Homeowners should not order an appraisal independently before speaking with their servicer because the servicer may require the valuation to be completed through a particular provider.

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How Can a Homeowner Potentially Remove PMI Faster?

Depending on the loan terms, a homeowner may be able to reach the required equity level sooner by:

• Making additional principal payments
• Applying a lump-sum payment to the principal
• Requesting cancellation after reaching the applicable equity threshold
• Documenting qualifying improvements to the property
• Obtaining a servicer-approved valuation when permitted
• Refinancing into a new loan that does not require PMI

Refinancing is not automatically the best solution. A new loan may come with a different interest rate, closing costs, appraisal expenses, and a new repayment schedule. The cost of refinancing should be compared with the amount that would be saved by eliminating PMI.

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Does PMI Vary From State to State?

The major cancellation and termination protections for many borrower-paid PMI policies are established under federal law and therefore are not unique to Georgia.

However, the actual cost and administration of mortgage insurance can vary based on the mortgage provider, insurer, investor, loan program, property, and borrower. State-sponsored homebuyer programs may also have their own eligibility standards, assistance terms, repayment obligations, or approved-loan requirements.

Georgia buyers using Georgia Dream or another down payment assistance program should review that program’s current requirements with an approved participating lender. Down payment assistance is not necessarily a grant, and it may involve a separate loan or repayment obligation.

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Is PMI Always a Bad Thing?

PMI increases the cost of a mortgage, but it is not necessarily a reason to delay buying a home.

For some buyers, PMI makes it possible to purchase a home without waiting several more years to accumulate a 20% down payment. Buying sooner may allow a household to begin building equity while retaining savings for moving expenses, repairs, emergencies, and other financial needs.

For other buyers, waiting and making a larger down payment may produce a more comfortable monthly payment and reduce the total cost of borrowing.

The right decision depends on the buyer’s finances, available cash, credit profile, expected time in the home, competing loan offers, and long-term plans.

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Questions Buyers Should Ask Their Lender

Before selecting a mortgage, buyers should ask:

• Will this loan require PMI or another form of mortgage insurance?
• How much will the mortgage insurance cost each month?
• Is any portion of it charged upfront?
• Is the premium fixed, or could it change?
• What conditions must be met to request cancellation?
• Will an appraisal or valuation be required?
• Does the loan qualify for automatic termination?
• Would another conventional, FHA, VA, USDA, or assistance-program loan have a lower total cost?
• What will the complete monthly payment be, including principal, interest, property taxes, homeowners insurance, mortgage insurance, and applicable association fees?

A qualified mortgage professional can provide loan-specific answers and written cost estimates.

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PMI Should Be Part of the Homebuying Conversation

The amount you place down affects more than the cash required at closing. It can influence the mortgage program, interest rate, PMI premium, monthly payment, available savings, and long-term cost of owning the home.

That is why it is valuable to begin planning before you are ready to make an offer.

Joanna “JoJo” Jones helps buyers throughout Macon and Middle Georgia understand the real estate side of the process, evaluate available properties, and prepare for the decisions that come with purchasing a home. While mortgage terms must come from a qualified lender, JoJo can help you connect the financing conversation with your home search so you can focus on properties that support your goals.

You do not have to understand every mortgage term before beginning your search. You simply need knowledgeable professionals who will help you ask the right questions.

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Thinking About Buying a Home in Macon or Middle Georgia? Call JoJo Today.

Whether you are preparing for your first home, moving into a larger property, downsizing, or relocating to Middle Georgia, the best time to begin planning is before the right home appears.

Contact Joanna “JoJo” Jones to start exploring your options and build a home search around your needs, priorities, and budget.

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Important Disclaimer

This article is provided for general educational and informational purposes only. It is not mortgage, lending, legal, tax, insurance, appraisal, or financial advice. PMI costs, cancellation rights, loan requirements, property-value standards, and mortgage insurance rules vary by loan type, lender, mortgage servicer, investor, insurer, property, borrower qualifications, program, and loan origination date. Government and assistance-program requirements may also change. Buyers and homeowners should consult a qualified mortgage lender, loan servicer, attorney, tax professional, insurance professional, or financial adviser regarding their specific circumstances. Joanna “JoJo” Jones and Sheridan Solomon & Associates do not provide mortgage lending, legal, tax, insurance, or financial advice.