What is PMI, and how do you remove it?
PMI is one of the most misunderstood lines on a mortgage statement. Let’s look at what it is, how the cost works, and when removal may be possible.
PMI, a little more clearly
PMI stands for private mortgage insurance. On a conventional loan, lenders generally require it when your down payment is less than 20 percent of the home's price. Here is the part that matters: PMI protects the lender, not you. If you default, the insurance pays part of the lender's loss. You pay the premium. The reason it exists is simple enough: a smaller down payment means more risk for the lender, and PMI is how that risk gets priced so the loan can happen at all. For many buyers, PMI is the toll that lets them buy years earlier instead of saving a full 20 percent while prices move. That can be a fair trade. It helps to understand both the cost and the removal options as you plan.
What PMI costs
PMI is priced as a yearly percentage of the loan amount, commonly somewhere in the range of a few tenths of a percent up to about 1 percent or more per year, then divided into monthly chunks inside your payment. The exact rate depends on your credit profile, your down payment size, and the loan type. Better credit and a larger down payment mean a cheaper premium. Because it is a percentage, the dollar cost is bigger on bigger loans, and it does not shrink as fast as you would hope, because it follows the loan balance and the pricing set at origination. When you compare Loan Estimates, do not just look for the PMI line. Multiply it out over the years you realistically expect to pay it. A modest monthly number becomes a serious sum across five or six years, which is precisely why the removal rules below deserve your attention.
Removal path one: time and payments
The scheduled path runs on the original amortization schedule. Federal law, the Homeowners Protection Act, gives conventional loan borrowers two milestones. First, once your balance is scheduled to reach 80 percent of the home's original value, you can request cancellation in writing to your loan servicer, as long as your payments are current and a few other conditions are met. Second, if you never ask, PMI must terminate automatically when the balance reaches 78 percent of the original value on the schedule, again provided you are current. Notice the phrase original value. This path ignores appreciation entirely. It only counts what you have paid down. It is reliable, it is free, and for most people it is slow. Write the 80 percent date on a calendar the week you close. Future you will be grateful.
Removal path two: your home gained value
If Sacramento-area prices have been kind, your equity may have grown much faster than your payments alone would explain. Many servicers will consider removing PMI based on a new appraisal showing the current value, typically once the loan is seasoned for a period they specify, often two to five years, with the required loan-to-value threshold stricter in the early years. The rules here are set by the loan's investor, not by federal law, so they vary, and the appraisal is at your expense. The honest way to approach it: call your servicer, ask for their exact written requirements before you spend a dollar on an appraisal, and get the answer in writing. If the numbers clear the bar with room to spare, it is often money well spent. If the value is close to the required threshold, ask your servicer whether waiting might make sense.
Removal path three: paying the balance down early
Extra principal payments move the 80 percent milestone closer, sometimes years closer. A lump sum, a refinance-free recast if your servicer offers one, or steady extra payments can all pull the date forward, and you can request removal based on the actual balance once it crosses 80 percent of the original value. Run the comparison honestly, though. Money used to remove PMI is money not used elsewhere, and PMI removal is a guaranteed return equal to the premium, which is sometimes the best deal on the table and sometimes not. Our affordability guide shows how principal and interest split inside a payment, which helps this math make sense.
The FHA difference, because it is a big one
FHA loans do not have PMI. They have MIP, the Mortgage Insurance Premium, and the rules work differently. For most FHA loans originated today with less than 10 percent down, MIP lasts for the entire life of the loan. There is no 78 percent milestone and no letter to write. The realistic exit is refinancing into a conventional loan once your equity and credit support it. That refinance has its own closing costs, which our closing costs guide breaks down, so the move only makes sense when the full math works, not just to escape one line item. None of this makes FHA a bad program. For many first-time buyers it is the right door in. Just walk through it knowing the insurance behaves differently.
A short word on avoiding PMI up front
You will hear about piggyback loans, where a second loan covers part of the down payment so the first stays at 80 percent, and about lender-paid PMI, where the lender covers the premium in exchange for a higher interest rate. Both have costs and trade-offs to understand. The piggyback adds a second payment, often at a higher rate. Lender-paid PMI trades a removable cost for a permanent one, because the higher rate stays until you refinance. Sometimes one of these is genuinely the right tool. A helpful question to ask is: what does each option cost me in total over the years I will actually keep this loan?
Frequently asked questions
Does PMI protect me if I cannot pay?
No. PMI protects the lender if you default. It does not make your payments, protect your credit, or benefit you beyond making a smaller down payment possible.
When does PMI go away on its own?
On most conventional loans, federal law requires automatic termination when your balance reaches 78 percent of the home's original value on the payment schedule, as long as you are current. You can usually request removal earlier, at 80 percent, by writing to your servicer. A rise in home value can support an earlier request, but the servicer sets the rules for that path and may require a new appraisal.
Is PMI the same on an FHA loan?
No. FHA charges MIP instead, and on most current FHA loans with under 10 percent down it lasts for the life of the loan. Refinancing into a conventional loan is the usual exit, and only when the total math works.
Have a question as you read? You can call or text me at (408) 406-7900.