Private mortgage insurance is required on a conventional mortgage whenever your down payment is less than 20% of the purchase price, which is the same as saying your loan-to-value ratio is above 80%. The rule traces to the federal charters that govern Fannie Mae and Freddie Mac: Fannie Mae cannot buy a mortgage on a one- to four-family home if the balance exceeds 80% of the property’s value unless the portion above 80% is covered by a qualified insurer.1Fannie Mae. Federal National Mortgage Association Charter Act Put down less than 20%, and the lender adds PMI so the loan can be sold on the secondary market. Government-backed loans handle this differently, and the rules for when PMI ends are separate from the rules for when it starts.
The 80% LTV Trigger on Conventional Loans
Loan-to-value ratio compares what you borrow to what the home is worth. On a $400,000 home, a $40,000 down payment (10%) leaves you borrowing $360,000, which is a 90% LTV. Because that exceeds 80%, PMI is required. An $80,000 down payment on the same home gives you an 80% LTV, and no PMI is needed.
Conventional programs let you put down as little as 3% through options like Fannie Mae’s HomeReady.2Fannie Mae. What You Need To Know About Down Payments A 3% down payment on that same $400,000 home means borrowing $388,000 at a 97% LTV, and PMI stays part of your monthly payment until you build enough equity to remove it.
How Much PMI Costs
PMI premiums typically run from about 0.2% to nearly 2% of the loan balance per year. Your credit score and LTV drive most of the difference. A borrower with a credit score above 760 and a 5% down payment might pay around 0.2% annually; a borrower with a score in the low 600s and the same down payment could pay well over 1%. Some lenders also adjust the rate based on the number of borrowers on the loan and your debt-to-income ratio.
On a $360,000 loan, a 0.5% annual PMI rate adds about $150 to your monthly payment. A 1.5% rate on the same loan adds roughly $450. The premium is usually collected through your escrow account alongside principal, interest, property taxes, and homeowners insurance.
Borrowers who put down 15% generally pay lower PMI rates than those who put down 5%, because the lender’s exposure is smaller.
When Government-Backed Loans Require Mortgage Insurance
FHA, VA, and USDA loans don’t follow the conventional PMI rule. Each program has its own approach, and the differences matter if you’re choosing between loan types.
FHA Loans
FHA loans require mortgage insurance regardless of your down payment. There are two pieces. The first is an upfront mortgage insurance premium of 1.75% of the base loan amount, usually rolled into the loan balance at closing.3HUD. Appendix 1.0 – Mortgage Insurance Premiums The second is an annual mortgage insurance premium paid monthly. For a standard 30-year FHA loan with a base amount at or below $726,200, the annual MIP runs 0.50% to 0.55% depending on LTV. Higher loan amounts carry annual rates between 0.70% and 0.75%.
How long that insurance lasts depends on your down payment. Put down at least 10%, and the annual MIP drops off after 11 years. Put down less than 10% (which includes the FHA minimum of 3.5%), and you pay the annual MIP for the life of the loan.3HUD. Appendix 1.0 – Mortgage Insurance Premiums You cannot cancel FHA mortgage insurance based on equity the way you can with conventional PMI. The only way out on a low-down-payment FHA loan is to refinance into a conventional mortgage once you have at least 20% equity.
VA Loans
VA loans require no monthly mortgage insurance of any kind, regardless of your down payment.4Department of Veterans Affairs. VA Home Loan Guaranty Buyers Guide You can put zero down and still avoid PMI. VA loans instead carry a one-time funding fee that varies with your down payment and whether you’ve used a VA loan before. Veterans with service-connected disabilities are exempt from the funding fee.
USDA Loans
USDA rural development loans require no down payment but charge an upfront guarantee fee and an annual fee. Like FHA mortgage insurance, these cannot be canceled based on equity and last for the life of the loan.
When PMI Ends on a Conventional Loan
Federal law gives you specific rights to remove PMI once you’ve built enough equity. The Homeowners Protection Act applies to single-family principal residences with mortgages closed on or after July 29, 1999,5Office of the Law Revision Counsel. 12 USC 4901 – Definitions and it sets three main endpoints.
You can request cancellation once your principal balance is scheduled to reach 80% of the home’s original value, or sooner if extra payments get you there ahead of schedule.6Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance PMI From My Loan The request must be in writing. You need a good payment history, meaning no payments 30 or more days late in the past 12 months and no payments 60 or more days late in the past 24 months. You must certify that there is no second mortgage or home equity line on the property, and you may need to provide an appraisal showing the property’s value hasn’t fallen below the original purchase price.
Even if you never ask, your servicer must automatically terminate PMI on the date your loan balance is first scheduled to reach 78% of the original property value under the initial amortization schedule.7Consumer Financial Protection Bureau. Homeowners Protection Act PMI Cancellation Act Procedures The only condition is that you must be current on your mortgage. If you’re behind when the 78% date arrives, termination happens on the first day of the month after you become current.
As a backstop, PMI must end no later than the midpoint of the loan’s amortization period, as long as you’re current.8Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance For a 30-year mortgage, that’s 15 years.
If your home has appreciated, you may be able to remove PMI earlier based on current value rather than original value. For Fannie Mae-backed loans, you can request cancellation if the loan is between two and five years old and your LTV is 75% or less, or if the loan is more than five years old and your LTV is 80% or less. You’ll need a new appraisal and the same payment-history standard as borrower-requested cancellation. Substantial home improvements can waive the two-year waiting period; routine maintenance doesn’t.9Fannie Mae. Termination of Conventional Mortgage Insurance
Ways to Avoid Monthly PMI With Less Than 20% Down
If you don’t have 20% but want to avoid a separate monthly PMI charge, three structures are common. Each has trade-offs.
Lender-Paid Mortgage Insurance
With lender-paid mortgage insurance, the lender covers the premium in exchange for a higher interest rate. You won’t see a PMI line on your statement, but the cost is built into every payment. The higher rate stays for the life of the loan unless you refinance, while standard PMI can be canceled at 20% equity. LPMI may work if you plan to sell or refinance within a few years, but it often costs more over the long term.
Single-Premium PMI
Single-premium PMI pays the full mortgage insurance cost in one upfront payment at closing, either out of pocket or financed into the loan balance. You avoid a monthly PMI charge, and coverage stays in place until the loan reaches 78% LTV.
Piggyback Loans
An 80-10-10 piggyback uses two mortgages plus a 10% down payment to avoid PMI. The first mortgage covers 80%, staying at the threshold that triggers PMI, while a second loan covers another 10%. The second loan typically carries a higher interest rate that may be variable, and you’ll need a strong credit score to qualify. Whether it beats a single loan with PMI depends on the rates and how long you keep the loans.
PMI When You Refinance
A refinance is a new loan, so PMI gets evaluated fresh. Even if you paid off PMI on your original mortgage, the new lender orders a current appraisal and calculates a new LTV. If the new loan amount exceeds 80% of the appraised value, PMI is required again.
Market direction cuts both ways. Rising values in your area may give you more equity than you expect, potentially enough to refinance without PMI. Falling values can put you in the opposite spot, with PMI unavoidable even if you originally put 20% down. Cash-out refinancing is especially likely to trigger PMI, because borrowing more than your current balance increases your LTV. PMI on a refinanced loan follows the same HPA cancellation rules, so the 80% borrower-requested and 78% automatic thresholds apply going forward.8Office of the Law Revision Counsel. 12 USC 4902 – Termination of Private Mortgage Insurance