What Is PMI and How Does It Work

Private mortgage insurance (PMI) is a cost many conventional borrowers pay when they put down less than 20%. It protects the lender, not you, if the loan defaults. Use the PMI calculator to estimate a monthly amount from the annual rate your lender quotes — that rate is an input, not a universal price.

When PMI typically applies

On many conventional loans, PMI is used when loan-to-value (LTV) is above 80% — a down payment below 20% of the home’s value used for the loan. Lender overlays, piggyback seconds, and lender-paid PMI structures can change that picture. FHA loans use mortgage insurance premiums (MIP), VA loans generally use a funding fee instead of PMI, and USDA loans use a guarantee fee. Those products are not the same as conventional PMI.

How the estimate is calculated

A common educational estimate is: annual PMI = loan amount × annual PMI rate, then divide by 12 for a monthly amount. Example: a $320,000 loan at an example 0.50% annual PMI rate is $1,600 per year, or about $133 per month. Actual pricing depends on credit, LTV, occupancy, and the insurer. Some policies are a flat monthly premium; others can change as the balance declines.

Cancellation is not a single switch

On many conventional mortgages, you may be able to request PMI cancellation when the principal balance reaches 80% of the home’s original value, subject to the loan being current and other requirements. PMI generally terminates automatically when the scheduled principal balance reaches 78% of original value, again if applicable requirements are met. Those thresholds come from the Homeowners Protection Act framework as explained by the Consumer Financial Protection Bureau; they are not a promise that every loan, including lender-paid PMI, works the same way.

Appraised-value cancellation (using a current appraisal rather than original value) is a separate request and is not guaranteed. Our calculators estimate current LTV from the numbers you enter; they do not model automatic cancellation inside the amortization schedule. See methodology for that limitation.

What PMI does not do

PMI does not reduce your interest rate by itself, does not insure your equity, and does not replace homeowners insurance. A larger down payment can remove the PMI line from an estimate, but it uses cash you might need for closing costs, reserves, or other debts. Compare that tradeoff in the full housing-payment calculator and in how much house you may be able to afford.