PMI (private mortgage insurance) is a premium that protects your lender, not you, if you default on a home loan, and U.S. lenders require it whenever you put down less than 20% on a conventional mortgage.
For millions of buyers, PMI is the price of getting into a home without a full 20% down payment. It is not a scam and it is not optional in that situation, but it is avoidable and removable. Below we explain how PMI works, what it costs, how it differs from Canada's mortgage default insurance, and the exact steps to cancel it.
What Is PMI and Who Does It Protect?
Private mortgage insurance is a policy your lender takes out, but that you pay for, to cover their loss if you stop making payments and the home is foreclosed. The crucial point that surprises many first-time buyers: the coverage protects the lender's money, not the homeowner. You get nothing back from PMI; you simply pay it so the lender will approve a higher-risk, low-down-payment loan.
- Required on conventional U.S. loans with less than 20% down.
- Charged until you build roughly 20% equity in the home.
- Separate from homeowners insurance, which protects your property.
To see how the down payment and loan size shape your monthly payment, run the numbers through our mortgage calculator.
How PMI Works on a Conventional Loan
When your loan-to-value (LTV) ratio is above 80%, meaning you borrowed more than 80% of the home's value, the lender adds PMI to your monthly payment. As you pay down the principal and the home appreciates, your equity grows, your LTV falls, and eventually PMI can be removed.
How PMI Is Priced
PMI usually runs from about 0.3% to 1.5% of the original loan amount per year. Your rate depends on your credit score, down payment size, and loan term. A smaller down payment and a lower credit score both push the premium higher.
What Does PMI Cost? A Worked Example
Imagine you buy a $400,000 home with a 10% down payment of $40,000, leaving a $360,000 loan. With less than 20% down, the lender requires PMI at, say, 0.6% per year:
- Annual PMI = 0.6% × $360,000 = $2,160
- Monthly PMI = $2,160 ÷ 12 = $180
That $180 is added on top of your principal, interest, taxes, and homeowners insurance every month until you reach 20% equity, costing you about $2,160 a year for nothing you keep. Compare scenarios with different down payments using the mortgage calculator, and if you are weighing a personal loan or second mortgage to avoid PMI, model it with the loan calculator.
How to Avoid or Cancel PMI
Avoiding It Upfront
- Put 20% down. The cleanest way to skip PMI entirely.
- Use a piggyback loan. An 80-10-10 structure splits financing so the first mortgage stays at 80% LTV.
- Choose lender-paid PMI. The premium is baked into a higher interest rate instead of a separate fee, which can be cheaper if you sell soon.
Cancelling Existing PMI
Under the U.S. Homeowners Protection Act, you can request PMI cancellation once your balance reaches 80% of the original home value, and the lender must automatically cancel it at 78% LTV if you are current on payments. Paying down principal faster or a rise in home value can get you there sooner.
PMI vs. Canadian Mortgage Default Insurance
Canada has a parallel system, but it works differently. When a Canadian buyer puts down less than 20%, mortgage default insurance is mandatory, provided by CMHC, Sagen, or Canada Guaranty. The key differences:
- The premium is usually a one-time charge added to the mortgage principal, not a monthly add-on.
- It cannot be cancelled once the loan closes, even as equity grows.
- The minimum down payment in Canada is 5% on the first $500,000 of price, with higher tiers above that.
Because the cost structures differ so much, many buyers in both countries run a rent-versus-own comparison before committing. Our rent vs. buy calculator factors these insurance costs into the decision.
Related Calculators
- Mortgage Calculator — estimate your monthly payment, including PMI.
- Loan Calculator — model a piggyback or second loan to avoid PMI.
- Rent vs. Buy Calculator — see whether buying with PMI still beats renting.
Need a quick definition of any mortgage term used above? Visit our financial glossary.
Frequently Asked Questions
What is PMI in simple terms?
PMI, or private mortgage insurance, is an insurance premium that protects the lender (not you) if you stop paying your home loan. U.S. lenders require it when you put down less than 20 percent on a conventional mortgage, and the cost is added to your monthly payment until you build enough equity.
How much does PMI cost?
PMI typically costs between 0.3 percent and 1.5 percent of the original loan amount per year, depending on your down payment and credit score. On a 320,000 dollar loan at 0.6 percent, that is about 1,920 dollars per year, or roughly 160 dollars added to your monthly payment.
How do I avoid or cancel PMI?
You can avoid PMI by putting down 20 percent or more, or by using a piggyback second loan. To cancel existing PMI, request removal once your loan balance reaches 80 percent of the original value, and under U.S. law it must be cancelled automatically at 78 percent if your payments are current.
Is mortgage insurance the same in Canada?
Canada uses mortgage default insurance from CMHC, Sagen, or Canada Guaranty, required when the down payment is under 20 percent. Unlike U.S. PMI, the Canadian premium is usually a one-time cost added to the mortgage principal rather than a monthly fee, and it is not cancellable once the loan closes.