Is PMI Based on Appraised Value or Purchase Price?

For a conventional mortgage, PMI is based on the lower of your home’s appraised value or the purchase price, not whichever number is higher. Federal law defines the property’s “original value” as the lesser of the contract sales price or the appraised value at the time of purchase, and that conservative figure becomes the baseline for whether you owe private mortgage insurance, how much it costs, and when you can get rid of it.¹

How the Lower Figure Sets Your PMI Requirement

When you apply for a conventional loan, the lender orders a professional appraisal to establish the home’s market value independently from what you agreed to pay. The lender then compares that appraised value to the contract purchase price and uses whichever is lower to calculate your loan-to-value ratio.² If that LTV exceeds 80%, you owe PMI.³

The reasoning is straightforward. Lenders don’t want to count equity that doesn’t exist. Say you offered $400,000 for a home and the appraiser values it at $390,000. The lender treats the property as $390,000 in collateral. A $320,000 loan against that value produces an LTV of about 82%, which triggers PMI even though your purchase contract might have implied a lower ratio.

The reverse scenario works the same way. If you’re buying at $390,000 and the appraisal comes back at $410,000, the lender still uses $390,000. You might be getting a good deal, but the lender bases risk on what you’re actually paying, not what the property could theoretically sell for. Either direction, the lower number controls.

When the Appraisal Comes in Below the Purchase Price

A low appraisal is one of the more disruptive events in a home purchase. It simultaneously raises your LTV ratio and opens a gap between what the lender will finance and what the seller expects. Lenders will not lend more than the appraised value supports, so you need to cover the shortfall somehow.

You generally have a few options:

Ask the seller to lower the purchase price to match the appraisal. In a buyer-friendly market this often works; in a competitive one the seller may refuse.
Pay the difference at closing. Extra cash bridges the shortfall but does not count toward your down payment for LTV purposes.
Walk away. Most purchase contracts include an appraisal contingency that lets you cancel without losing your earnest money if the appraisal falls short.
Dispute the appraisal through the lender if you believe the appraiser missed comparable sales or made errors. Reversals are rare but possible when the comps clearly support a higher number.

Whatever you choose, the lender’s LTV calculation, and therefore your PMI requirement, will be based on the appraised value. Paying a premium above appraised value pushes more money into the purchase without changing the LTV math at all.

The Same Value Follows You Into Cancellation

The value used to set up your loan is the same value that governs when you can cancel PMI. The federal Homeowners Protection Act gives you the right to request cancellation once your loan balance reaches 80% of the property’s original value, whether you get there through scheduled payments or extra principal payments.⁴ “Original value” here carries the same statutory meaning: the lower of your purchase price or appraised value at the time of purchase.¹

To exercise the right, you send a written request to your servicer. The servicer verifies several conditions before dropping PMI. You must have no payments 30 or more days late in the last 12 months and no payments 60 or more days late in the last 24 months.⁵ You must be current. The mortgage holder may require evidence that the property’s value has not dropped below the original value. And you must certify that no subordinate lien, like a home equity loan or HELOC, encumbers your equity.⁶

This cancellation path does not require your home to have appreciated. You are simply demonstrating that you have paid the balance down enough relative to the original value. The evidence the servicer asks for is confirmation that the property has not lost value, a much lower bar than proving it is worth more than when you bought it.

Even if you never ask, your servicer must automatically terminate PMI when your balance is scheduled to reach 78% of the original property value, based solely on the initial amortization schedule.⁷ “Scheduled to reach” is the phrase to watch. The servicer looks at the original payment schedule, not your actual balance. If you have been making extra payments and your real balance is already below 78%, automatic termination does not accelerate. It still follows the schedule. To capture the benefit of extra payments, you need to submit a cancellation request at the 80% mark.

The HPA also includes a backstop called final termination. If PMI has not ended by the midpoint of your loan’s amortization period, the servicer must drop it then.⁶ For a 30-year mortgage, that is the 15-year mark.

When a New Appraisal Can Replace the Original Value

There is one important exception to the rule that the original value controls. If your home has appreciated, Fannie Mae and Freddie Mac allow you to request cancellation based on the current appraised value instead of the original value. This path lives outside the HPA and follows investor guidelines, which impose a seasoning requirement and tighter LTV thresholds during the early years of the loan.

Two to five years of seasoning: your balance must be 75% or less of the home’s current appraised value.
More than five years of seasoning: your balance must be 80% or less of current appraised value.⁸⁹

If you have made substantial improvements that raised the property’s value, both Fannie Mae and Freddie Mac waive the two-year seasoning requirement, though you still need an LTV of 80% or less based on the new appraisal.⁸ Multi-unit and investment properties face a stricter 70% LTV with more than two years of seasoning.

To use this path, you pay for a new appraisal from a lender-approved appraiser. National averages run roughly $350 to $425 for a standard single-family home, though prices vary by location, property size, and complexity. The same payment history rules apply.⁸

Do the math before ordering the appraisal. Divide your current loan balance by the value you think the home would appraise for. If the result isn’t comfortably below the required threshold, a disappointing appraisal just costs you a few hundred dollars with nothing to show for it. Online home value estimates give a rough sense but aren’t reliable enough to bet on, so build in a cushion of several percentage points.

One more thing can block the current-value path: subordinate liens. If you have a HELOC or a piggyback second mortgage on the property, you cannot cancel PMI through a borrower-initiated request until that lien is closed or paid off.⁶ Automatic termination at 78% still happens on schedule regardless.

FHA Loans Don’t Follow This Framework

Everything above applies to conventional loans with private mortgage insurance. FHA loans use a separate system called a mortgage insurance premium, or MIP, and the Homeowners Protection Act does not apply to it. There is no 80% cancellation request, no 78% automatic termination, and no midpoint backstop for FHA borrowers.

For any FHA loan originated after June 3, 2013, with a down payment below 10%, the annual MIP remains for the life of the loan. It only goes away if you refinance into a conventional mortgage, sell the home, or pay the balance off. If your down payment was 10% or more, MIP drops off after 11 years. Because the original-value rules that govern PMI do not reach FHA insurance, refinancing into a conventional loan once you have enough equity is one of the most common ways FHA borrowers get out from under the ongoing cost.

1
Office of the Law Revision Counsel. 12 U.S. Code 4901 – Definitions
2
Fannie Mae. Loan-to-Value (LTV) Ratios
3
Fannie Mae. What to Know About Private Mortgage Insurance
4
Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance (PMI) From My Loan?
5
Federal Reserve. Homeowners Protection Act
6
CFPB Consumer Laws and Regulations. Homeowners Protection Act (PMI Cancellation Act) Procedures
7
Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance
8
Fannie Mae. Termination of Conventional Mortgage Insurance
9
Freddie Mac. Guide Section 8203.2