What PMI is and who it protects
Private mortgage insurance is a policy the lender buys and you pay for. If you default and the foreclosure sale does not cover the balance, the insurer reimburses the lender for part of the loss. You get nothing from it directly — no death benefit, no coverage of your own equity, no protection against foreclosure. What you get is access to a conventional loan with less than 20% down, which for most first-time buyers is the whole point.
The premium is normally quoted as an annual percentage of the original loan amount and collected monthly with your payment. On a $329,000 loan at 0.55%, that is 329,000 × 0.0055 ÷ 12 = $150.79 a month. The rate itself is set by a grid of credit score against loan-to-value, and it moves a long way across that grid: a borrower with a high score at 85% LTV pays a small fraction of what a borrower with a weak score at 97% LTV pays.
PMI is temporary by law on conventional loans, which is what separates it from FHA mortgage insurance. The Homeowners Protection Act of 1998 gives you a right to request cancellation at 80% and requires the servicer to terminate automatically at 78%, both measured against the original value. Understanding those two dates — and the gap between them — is worth real money.
Three ways PMI ends, and the value each one uses
The Homeowners Protection Act creates two rights and one backstop. All three are about the loan balance; the difference is which value it is compared against, and who has to act.
1. Borrower-requested cancellation at 80%
You may request cancellation in writing when the balance reaches 80% of the original value — the lesser of the purchase price and the original appraised value — either on the original amortisation schedule or because you have paid the balance down. The servicer must comply if your payment history is good, there are no junior liens, and, where the servicer requires it, the property's value has not declined below the original value. Nothing happens automatically: you have to ask.
2. Automatic termination at 78%
The servicer must terminate PMI on the date the balance is scheduled to reach 78% of the original value, provided you are current. This is automatic and needs no request, but it arrives later — on the default figures, twelve months later than the 80% point.
3. Final termination at the midpoint
If the balance has still not reached 78% by the midpoint of the amortisation period — month 180 of a thirty-year loan — PMI must end anyway, provided you are current. This matters mainly on loans that amortise slowly.
A fourth route sits outside the Act. Fannie Mae and Freddie Mac allow cancellation based on the property's current value rather than its original value, subject to seasoning requirements and a new appraisal you pay for. That is what the appreciation input models here, and in an appreciating market it can be the fastest route by years. It is also a request, not a right, and the LTV thresholds required for a value-based cancellation are stricter than 80% in the early years.
Worked example: $350,000 home with 6% down at 6.5%
You buy at $350,000 with 6% down on a thirty-year fixed at 6.5%, and your Loan Estimate shows PMI at 0.55%.
- Down payment. 350,000 × 0.06 = $21,000, so the loan is $329,000.
- Starting LTV. 329,000 ÷ 350,000 = 94.0%.
- Monthly PMI. 329,000 × 0.0055 ÷ 12 = $150.79.
- Monthly principal and interest. With r = 0.00541667 and n = 360, M = $2,079.50.
- The 80% threshold. 350,000 × 0.80 = $280,000.
- When the balance gets there. The balance after k payments is Bk = 383,907 − 54,907 × 1.00541667k. Setting that equal to 280,000 gives 1.00541667k = 1.89242, so k = ln(1.89242) ÷ ln(1.00541667) = 0.63790 ÷ 0.00540205 = 118.1 — the balance is below $280,000 after the 119th payment, or 9 years 11 months.
- The 78% threshold. 350,000 × 0.78 = $273,000, reached the same way at k = 130.1, so after the 131st payment.
- Total PMI if you request cancellation at 80%. 150.79 × 119 = $17,944.
- Total PMI if you wait for automatic termination. 150.79 × 131 = $19,754.
- The cost of not asking. 19,754 − 17,944 = $1,810, which is twelve months of premium for doing nothing.
- Lump sum to reach 80% today. 329,000 − 280,000 = $49,000.
Step 10 is the actionable one. Twelve extra months of premium is the price of not writing a letter, and servicers are not required to remind you the 80% date is coming. Diarise it the month you close.
PMI is not the same as FHA mortgage insurance
FHA loans carry a different product: an upfront premium financed into the loan, plus an annual mortgage insurance premium collected monthly. Under current FHA rules that annual premium runs for the life of the loan when the down payment is below 10%, and for eleven years at 10% or more. The Homeowners Protection Act's 80% and 78% cancellation rules do not apply to it. That is the single most important difference between the two programmes at low down payments, and it is why refinancing out of FHA once you have equity is a standard move that has no conventional equivalent.
How to decide what to do about it
PMI is usually a cost worth paying rather than one worth avoiding, and the reason is arithmetic rather than sentiment. On the worked example, waiting to save the full 20% would mean accumulating $70,000 instead of $21,000 — another $49,000 — while the premium costs $150.79 a month. Whether waiting wins depends entirely on what the property does in the meantime and how long the saving takes.
Four levers change the outcome, and they are worth ranking:
- Ask for cancellation on the day you qualify. Zero cost, and worth $1,810 on the default figures. This is the highest-return action on the list.
- Extra principal. Every dollar of extra principal moves both dates forward, and the return on those dollars is not just the mortgage rate — it is the rate plus the premium you stop paying earlier. A borrower who can clear the $49,000 gap in a lump immediately eliminates $150.79 a month.
- A value-based cancellation. In a market that has risen, an appraisal costing a few hundred dollars can end the premium years early. Check your investor's seasoning rules first — the required LTV is tighter in the first two years than after five.
- Lender-paid PMI. The lender pays the premium and charges you a higher rate instead. It usually lowers the payment while you would have had PMI and raises it for the entire remaining term afterwards, because the rate never drops. It suits a short expected hold and is expensive over thirty years.
One thing that does not change the schedule-based dates: the property's value. Both the 80% cancellation right and the 78% automatic termination are measured against the original value, which is fixed at closing. A market decline does not push those dates back — though it can give the servicer grounds to decline a cancellation request if a current valuation shows the value has fallen.
Monthly PMI premium by rate
| Annual PMI rate | Monthly per $100,000 | Per $329,000 |
|---|---|---|
| 0.30% | $25.00 | $82.25 |
| 0.45% | $37.50 | $123.38 |
| 0.55% | $45.83 | $150.79 |
| 0.75% | $62.50 | $205.63 |
| 1.00% | $83.33 | $274.17 |
| 1.50% | $125.00 | $411.25 |
Multiply the middle column by your loan in hundred-thousands. The premium does not depend on the interest rate — but the rate determines how long you pay it, because it sets how fast the balance falls.
Mistakes that cost money
- Waiting for the servicer to act at 80%. Only the 78% termination is automatic. The 80% cancellation requires a written request from you, and nobody is obliged to remind you.
- Assuming appreciation moves the automatic dates. Both statutory thresholds use the original value, fixed at closing. Rising value opens a separate, investor-governed route that needs an appraisal and a request.
- Confusing PMI with FHA mortgage insurance. The cancellation rules are completely different, and at low down payments the FHA premium can last the life of the loan.
- Thinking PMI protects you. It protects the lender's loss position. Your own risk is unchanged.
- Taking lender-paid PMI for a long hold. The higher rate lasts the whole term, long after borrower-paid PMI would have ended.
- Adding a second lien and then requesting cancellation. The Act's cancellation right is conditioned on there being no junior liens on the property.
- Ignoring the midpoint backstop. On a slowly amortising loan, PMI must end at the midpoint of the amortisation period regardless of the balance, provided you are current.
PMI in the wider decision
PMI is one line in a larger comparison, and it is rarely the line that should decide anything.
Against a larger down payment. More cash down avoids the premium and lowers the balance, but it also commits capital and delays the purchase. Work the whole payment both ways in the mortgage payment calculator and check what each version does to your qualifying ratios in the home affordability calculator — a smaller down payment with PMI sometimes qualifies you for a smaller price, because the premium eats into the housing ratio.
Against an 80/10/10 piggyback. A first mortgage at 80% plus a second lien for 10% avoids PMI entirely. The second lien is usually variable and always more expensive than the first, so compare the blended cost against the premium rather than assuming the structure that avoids PMI must be cheaper. Note also that the junior lien blocks the statutory cancellation route on the first mortgage.
Against waiting. This is the real question for most buyers, and it turns on what the market does while you save. Nobody can answer it from a formula, but you can bound it: on the default figures the premium runs to $17,944 if you cancel promptly, which is 5.1% of the purchase price. If prices rise more than that before you would have reached 20% down, buying earlier with PMI wins on the price alone, before counting the rent you no longer pay. The rent vs buy calculator is where that comparison belongs.
Finally, track your position over time. The loan-to-value calculator tells you where you stand today against both the original and the current value, which is exactly the pair of numbers a cancellation request turns on.