Why Lenders Require PMI

When a buyer puts down less than 20%, the lender is financing a larger share of the home's value and takes on more risk. If the borrower defaults early in the loan — before building meaningful equity — the lender could lose money on a foreclosure sale. PMI transfers that risk to a private insurance company, allowing lenders to extend loans to buyers with smaller down payments while limiting their own exposure.

From a lender's perspective, a loan with a down payment below 20% carries a higher loan-to-value (LTV) ratio — meaning the loan balance is a high percentage of the home's appraised value. For context, an LTV above 80% typically triggers the PMI requirement on conventional loans. For a fuller explanation of LTV and other financing terms, see our mortgage terminology guide.

0.5%–1.5%

Typical annual PMI cost as a share of loan amount

According to the Urban Institute and industry mortgage data, PMI rates vary based on credit score, down payment, and loan characteristics.

~37%

Conventional purchase loans with less than 20% down

National Association of Realtors data consistently shows a substantial share of conventional buyers put down less than 20%, making PMI a common feature of many loans.

80%

LTV threshold for PMI cancellation request

Under the federal Homeowners Protection Act, borrowers may request PMI cancellation once the principal balance falls to 80% of the home's original value.

What PMI Costs and How It's Paid

PMI is most commonly paid as a monthly premium rolled into your mortgage payment, often collected through an escrow account alongside property taxes and homeowners insurance. To understand how escrow accounts collect and disburse these charges, see our article on escrow accounts in mortgages.

Annual PMI premiums typically range from roughly 0.5% to 1.5% of the original loan amount, though the exact figure depends on your credit score, down payment size, loan term, and the insurer. On a $300,000 loan, that translates to approximately $1,500 to $4,500 per year — or $125 to $375 per month added to your payment.

Some borrowers choose to pay PMI as a single upfront premium at closing, while others negotiate a split arrangement. Each structure has implications for total cost and flexibility. Thinking of PMI in relation to other recurring insurance costs? Our overview of insurance premiums explains how monthly insurance charges are structured more broadly.

Track Your Equity Progress Proactively

Don't wait for your servicer to notify you when you're eligible for PMI cancellation — they're only legally required to act at 78% LTV. Check your annual mortgage statement each year to monitor your remaining balance and request cancellation as soon as you hit 80%. If you've made extra principal payments, you may reach that milestone years ahead of the standard schedule.

When and How PMI Ends

The Homeowners Protection Act (HPA), a federal law enacted in 1998, establishes clear rights for borrowers with PMI on conventional loans:

  • Borrower-requested cancellation: Once your loan balance reaches 80% of the home's original appraised value, you can submit a written request to cancel PMI. Lenders may require a satisfactory payment history and a current appraisal.
  • Automatic termination: When your balance reaches 78% of the original value — based on your scheduled amortization — the lender must automatically cancel PMI, even without a request.
  • Final termination: If PMI has not been canceled by the midpoint of your loan term (for example, year 15 on a 30-year mortgage), the lender must terminate it at that point regardless of your balance.

Appreciation can work in your favor. If your home's market value has risen significantly since purchase, you may be able to request a formal appraisal and ask your servicer to recalculate your LTV based on the current value. Lenders are not required to honor appreciation-based requests under the HPA, but many servicers do consider them — check your loan agreement or contact your servicer directly.

This article is for general informational purposes only and does not constitute personalized financial or mortgage advice. Consult a licensed mortgage professional for guidance specific to your situation.