Private Mortgage Insurance (PMI) is typically required on conventional loans when high Loan-to-Value ratios lead to PMI—usually when the borrower puts down less than 20%. PMI protects lenders, not borrowers, and adds to monthly costs. Understanding how your LTV triggers PMI, along with strategies like larger down payments or refinancing, can help reduce or eliminate it. PMI can be canceled once equity reaches 20%, or automatically removed at 22% loan-to-value.
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is a type of insurance that protects the lender, not the borrower. It is typically required for conventional loans when the borrower puts down less than 20% of the home’s purchase price.
Since a low down payment increases the risk for the lender, PMI acts as a financial cushion. If the borrower defaults, PMI helps the lender recover some of the lost funds.
Key Facts About PMI:
- Applies only to conventional loans (FHA and VA have different insurance structures)
- Required when LTV exceeds 80%
- Typically added to your monthly mortgage payment
- Can cost between 0.3% to 1.5% of the original loan amount annually
- Can often be removed once the loan balance reaches 78% of the home’s original value
What Is Loan-to-Value (LTV) and Why It Matters
Your Loan-to-Value ratio (LTV) is a simple calculation that measures the size of your loan relative to your home’s appraised value. It’s one of the key risk indicators lenders use when underwriting a mortgage.
How to Calculate LTV:
LTV=(Loan AmountHome Value)×100\text{LTV} = \left(\frac{\text{Loan Amount}}{\text{Home Value}}\right) \times 100LTV=(Home ValueLoan Amount)×100
Example:
- Home Price: $400,000
- Down Payment: $40,000 (10%)
- Loan Amount: $360,000
- LTV = (360,000 ÷ 400,000) × 100 = 90%
Since the LTV is above 80%, PMI is required in this scenario.
How LTV Triggers PMI
Lenders typically use LTV tiers to determine whether PMI is necessary and how much it will cost.
| LTV Range | PMI Required? | Cost Implication |
| 80% or less | ❌ No | No PMI necessary |
| 81%–90% | ✅ Yes | Standard PMI rates |
| 91%–95% | ✅ Yes | Higher PMI premiums |
| Above 95% | ✅ Yes | Highest PMI rates |
The higher the LTV, the more risk the lender takes—and the more PMI you’ll pay.
How Much Does PMI Cost?
PMI costs vary based on several factors, but generally range between 0.3% to 1.5% of the loan amount annually.
Real-World Example:
- Loan Amount: $350,000
- PMI Rate: 0.8%
- Annual PMI: $2,800
- Monthly PMI: $233.33
Over 5 years, that’s nearly $14,000 in PMI payments—money that goes toward protecting the lender, not building your equity.
Factors Affecting PMI Rates:
- Credit score (Lower score = higher PMI)
- Loan term (Shorter terms often = lower PMI)
- Down payment size
- LTV ratio
- Type of mortgage (fixed vs. adjustable)
Try a PMI Calculator to estimate your monthly PMI cost.
How to Avoid or Eliminate PMI
While PMI can make homeownership more accessible, there are ways to reduce or avoid it.
1. Make a 20% Down Payment
The most straightforward way to bypass PMI is by putting down at least 20% of the home’s value.
2. Choose Lender-Paid PMI (LPMI)
With LPMI, the lender covers the insurance cost in exchange for a slightly higher interest rate. This might result in lower monthly payments, but you’ll pay more in interest over time.
3. Use a Piggyback Loan (80-10-10)
Structure your financing like this:
- 80% First mortgage
- 10% Second mortgage (HELOC or second lien)
- 10% Down payment
This keeps your primary LTV at 80%, avoiding PMI.
4. Refinance Your Mortgage
If your home’s value has risen or you’ve paid down your loan, refinancing to a new loan with an LTV of 80% or less can eliminate PMI.
5. Request PMI Cancellation
Once your LTV reaches 80%, you can request PMI removal. Lenders must cancel it automatically at 78% under the Homeowners Protection Act—provided your mortgage is in good standing.
Strategies to Reach 80% LTV Faster
Want to drop PMI sooner? These tips help reduce your LTV more quickly:
- Make extra principal payments each month
- Track your home value—rising prices lower your LTV
- Refinance after significant home improvements or market appreciation
- 📉 Shorten your loan term to build equity faster
When and How PMI Is Removed
| Method | LTV Trigger | Borrower Action? | Notes |
| Automatic cancellation | 78% | ❌ No | Kicks in automatically if you’re current |
| Borrower-requested removal | 80% | ✅ Yes | Requires a written request and clean history |
| Reappraisal-based removal | <80% (new value) | ✅ Yes | May require paying for a new appraisal |
| Refinance-based removal | ≤80% | ✅ Yes | Subject to closing costs and loan qualification |
Tip: Always monitor your statements and reach out to your lender when you’re close to 80%.
FAQs:
Is PMI tax-deductible?
As of the latest IRS rules, PMI may be tax-deductible, depending on your income. Check IRS Topic No. 505 or consult a tax advisor.
Do government-backed loans have PMI?
FHA loans use MIP (Mortgage Insurance Premium), which works similarly but typically lasts the life of the loan. VA loans don’t require PMI.
Can I avoid PMI with bad credit?
It’s tough. A high credit score helps reduce PMI costs. With lower credit, you may need to increase your down payment to offset risk.
For Real Estate Professionals and Investors
If you’re advising clients or evaluating deals yourself, keep these PMI insights in mind:
- Use PMI and LTV calculators during client consultations
- Evaluate break-even points on down payment vs. PMI cost
- For investors, factor PMI into cash flow and ROI analysis
Example:
- Property Price: $250,000
- PMI Cost: $150/month
- Rental Income: $1,600/month
After accounting for PMI, your net return might shrink by 10%, impacting investment decisions.
Key Takeaways
- PMI is typically required for conventional loans with LTV > 80%
- It’s an added cost for borrowers but protection for lenders
- Understanding your LTV and down payment options can help avoid or reduce PMI
- PMI can be canceled once equity hits 20%, or automatically at 22%
Use tools like PMI calculators and equity trackers to stay informed