How PMI Works — And How to Get Rid of It

If you're buying a home with less than 20% down on a conventional loan, your lender is going to require private mortgage insurance — PMI. It shows up on your monthly statement, adds to your payment, and a lot of buyers don't fully understand what it is, why it exists, or how to get rid of it.

Here's everything you need to know.

What Is PMI?

Private mortgage insurance is a policy that protects your lender — not you — if you default on the loan. When you put less than 20% down, the lender is taking on more risk. PMI is their insurance against that risk.

You pay for it, but it doesn't protect you in any way. That's the part most buyers find frustrating. It's purely a cost of borrowing with a smaller down payment.

PMI only applies to conventional loans. FHA loans have their own mortgage insurance structure — called MIP — which works differently and is generally less flexible. If you're on an FHA loan, the rules below don't apply to you. For a full comparison, see FHA vs Conventional in Massachusetts.

How Much Does PMI Cost?

PMI is typically calculated as an annual percentage of your loan amount, paid monthly. The rate varies based on your credit score, down payment, and lender — but generally falls between 0.5% and 1.5% per year.

On a $500,000 loan at 1% PMI, that's $5,000 per year — or about $417 per month added to your payment. On a $750,000 loan, the same rate would be roughly $625 per month.

The better your credit score and the more you put down, the lower your PMI rate will be. A buyer putting 15% down with a 780 credit score will pay significantly less than a buyer putting 5% down with a 660 score.

Many buyers are surprised to learn that conventional PMI is not always expensive. For borrowers with strong credit, lower debt-to-income ratios, and higher down payments, PMI can sometimes be far lower than people expect — low enough that it makes more financial sense to put less down, keep cash in reserve, and let the PMI cancel naturally as equity builds.

When Does PMI Go Away?

This is where conventional loans have a significant advantage over FHA — PMI isn't permanent. There are several ways it can be removed:

1. Automatic Cancellation at 78% LTV

Under the federal Homeowners Protection Act, your lender is required to automatically cancel PMI once your loan balance drops to 78% of the original purchase price — as long as you're current on your payments. You don't have to do anything; it cancels automatically based on your amortization schedule.

The catch: this is based on your original purchase price, not your current home value. If your home has appreciated significantly, you may be able to cancel PMI faster through a different route (more on that below).

2. Requesting Cancellation at 80% LTV

You don't have to wait for automatic cancellation. Once your loan balance reaches 80% of the original purchase price, you can request in writing that your lender cancel PMI. They're required to honor this request as long as you have a good payment history and no other liens on the property.

3. Cancellation Based on Current Home Value

If your home has appreciated in value, you may be able to cancel PMI earlier by demonstrating that your current loan balance is 80% or less of your home's current market value — not the original purchase price.

To do this, you'll typically need to request a new appraisal at your expense (usually $500–$700). If the appraisal supports the value, your lender can remove PMI even if you haven't paid down 20% of the original balance. In Massachusetts, where appreciation has been strong over the past several years, this route has worked well for a lot of homeowners.

4. Refinancing

If you refinance your mortgage and the new loan is at 80% LTV or below based on the appraised value, PMI won't be required on the new loan. This is a common strategy for homeowners who've seen significant appreciation.

How PMI Is Structured — Single Premium vs. Monthly

Most buyers pay PMI as a monthly premium added to their mortgage payment — but that's not the only option. There are a few different structures worth knowing about:

Monthly PMI: The most common structure. A monthly charge added to your payment until PMI is cancelled. Flexible because you're not locked in.

Single premium PMI: You pay the entire PMI cost upfront at closing as a lump sum. Your monthly payment is lower, but you pay more at closing — and if you sell or refinance early, you generally don't get a refund.

Lender-paid PMI (LPMI): The lender pays your PMI upfront in exchange for a slightly higher interest rate on your loan. Your monthly payment may be lower in the short term, but because it's baked into your rate, it doesn't go away when you hit 20% equity — you'd need to refinance to get rid of it.

Which structure makes the most sense depends on how long you plan to stay in the home, your cash position at closing, and your rate sensitivity. It's worth running the numbers with your loan officer before defaulting to monthly.

PMI vs. FHA Mortgage Insurance — What's the Difference?

This is one of the most important comparisons first-time buyers need to understand.

Conventional PMI can be cancelled once you reach 20% equity — either through paying down the loan, home appreciation, or refinancing. FHA mortgage insurance on loans with less than 10% down is permanent for the life of the loan. The only way out of FHA mortgage insurance is to refinance into a conventional loan.

FHA loans often have a lower interest rate, which is why many loan officers recommend them. But when you factor in the 1.75% upfront mortgage insurance premium (added to your loan balance at closing) and the permanent monthly MIP, conventional financing with PMI is frequently the better long-term deal for buyers with decent credit.

The breakeven point — where conventional beats FHA — depends on your specific credit score, down payment, and how long you plan to stay in the home. It's not a universal rule, but it's a calculation worth doing before you decide.

How to Minimize or Avoid PMI Altogether

If you want to avoid PMI entirely, here are your main options:

• Put 20% down. The straightforward solution — no PMI required. On a $600,000 home that's $120,000, which isn't realistic for most first-time buyers in Massachusetts. See how much cash you actually need to buy in Massachusetts.
• Use a piggyback loan (80/10/10). Take out a first mortgage for 80% of the purchase price, a second mortgage for 10%, and put 10% down. No PMI because the first loan is at 80% LTV. The second mortgage carries its own rate and payment, so the math needs to work out.
• VA loan. If you're an eligible veteran, active-duty service member, or surviving spouse, VA loans require no down payment and no mortgage insurance at all. One of the best financing tools available. See VA loan eligibility requirements.
• Lender-paid PMI. As described above — PMI is covered by a slightly higher rate. Lower monthly payment but less flexibility long-term.
• MassHousing WorkforceAdvantage (WFA 4.0). For eligible Massachusetts first-time buyers, MassHousing's WFA 4.0 conventional product has no borrower-paid mortgage insurance — MassHousing covers it. This is a genuinely powerful option for buyers who qualify.

The Bottom Line on PMI

PMI isn't ideal, but it's also not the obstacle many buyers treat it as. It's the cost of buying a home with less than 20% down — and on a conventional loan, it's temporary. Buyers who wait until they've saved a full 20% down payment often spend years paying rent while home values and interest rates move in ways they can't control.

A better framework: understand what your PMI will cost, know exactly when and how you can remove it, and factor that into your overall decision — rather than letting it stop you from buying altogether. For more on why waiting rarely pays off the way buyers expect, see why waiting for mortgage rates to drop is costing you money.