If you're putting less than 20% down on a conventional loan, you've probably run into three letters that nobody explains well: PMI. Let's fix that.
What is PMI?
PMI stands for private mortgage insurance. On a conventional loan, when your down payment is below 20% of the purchase price, the lender requires it. Here's the part that surprises people: PMI protects the lender, not you. If you stopped paying and the loan went into default, the insurance covers the lender's loss — but you're the one paying the premium.
It's not a scam, and it's not optional at that down-payment level. It's the trade-off that lets you buy a home without saving up a full 20% first.
Why do lenders require it?
A smaller down payment means the lender has more money at risk if the loan goes bad. PMI is how they offset that risk. Once you have enough equity in the home, that risk shrinks — and that's exactly why federal law gives you a path to remove PMI.
How do you get rid of PMI?
This is the good news, and it comes straight from federal law — the Homeowners Protection Act of 1998. For PMI on a conventional loan, there are three milestones tied to your loan-to-value (LTV) ratio:
- 80% LTV — you can request cancellation. Once your balance reaches 80% of the home's original value (based on your amortization schedule), you have the right to ask your servicer to cancel PMI. You generally need to be current on payments and have a clean recent payment history.
- 78% LTV — automatic termination. When your balance reaches 78% of the original value, your servicer must remove PMI automatically, as long as you're current on the loan. You don't have to ask.
- Loan midpoint — final backstop. If for some reason you haven't hit those thresholds, PMI must end at the halfway point of your loan term (for example, year 15 of a 30-year loan) if you're current.
You may also be able to cancel earlier if your home's value has risen and you can document it with a new appraisal — that's handled through your servicer and depends on their requirements and investor guidelines.
One important distinction: PMI is not FHA MIP
People mix these up constantly. PMI is on conventional loans. FHA loans have a different charge called MIP (mortgage insurance premium), and the rules for removing it are not the same — on many FHA loans, MIP stays for the life of the loan unless you refinance out of FHA. If you're not sure which one you have, that's worth a conversation.
The bottom line
PMI feels like a penalty, but it's really a temporary cost with a built-in exit ramp written into federal law. If you want help figuring out where you are on that timeline — or whether refinancing makes sense to drop it sooner — I'm happy to look at your specific situation.
