When Is Private Mortgage Insurance (PMI) Required?

Private Mortgage Insurance (PMI) is a type of insurance policy typically required for homebuyers who obtain a conventional mortgage loan with a down payment of less than 20% of the home’s purchase price. This insurance does not protect the borrower directly; rather, its primary purpose is to safeguard the mortgage lender against potential financial losses if the borrower defaults on their loan payments. Lenders consider loans with lower down payments to carry a higher risk of default, and PMI helps mitigate this risk. While often associated with conventional loans, other types of mortgages, such as those insured by the Federal Housing Administration (FHA), have their own distinct mortgage insurance requirements.

Conventional Loan PMI Triggers

Private Mortgage Insurance becomes a requirement for conventional loans when the borrower’s Loan-to-Value (LTV) ratio exceeds 80%. This means that the amount borrowed is more than 80% of the home’s value, indicating a down payment of less than 20%. The LTV ratio is calculated by dividing the loan amount by the home’s appraised value or the purchase price, whichever is lower. For instance, if a home is purchased for $300,000 with a $30,000 down payment, the loan amount is $270,000, resulting in a 90% LTV ($270,000 / $300,000).

The cost of PMI is an additional monthly expense added to the borrower’s mortgage payment, and it can vary significantly. Factors influencing the cost include the loan-to-value ratio, the borrower’s credit score, and the loan type. A higher LTV ratio or a lower credit score will generally result in a higher PMI premium, reflecting the increased risk to the lender.

PMI rates typically range from 0.46% to 1.5% of the original loan amount per year, although some sources indicate a broader range of 0.2% to 2.25%. This annual percentage is then divided into twelve monthly payments. For example, on a $300,000 loan with a 0.5% PMI rate, the annual cost would be $1,500, translating to an additional $125 per month.

Borrowers typically pay PMI as part of their regular monthly mortgage bill, although some lenders may offer options for an upfront payment or a combination of upfront and monthly premiums. It is important to understand that PMI is distinct from homeowners insurance, which protects the homeowner and their property.

Mortgage Insurance for FHA and VA Loans

Mortgage insurance requirements differ significantly for government-backed loans such as those from the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). These programs serve specific purposes and have distinct premium structures compared to conventional loan Private Mortgage Insurance (PMI). Despite their differences, both FHA Mortgage Insurance Premium (MIP) and the VA Funding Fee protect the entity guaranteeing the loan, enabling lenders to offer more accessible financing options.

FHA loans require a Mortgage Insurance Premium (MIP), which involves both an upfront premium and an annual premium. The upfront MIP is 1.75% of the base loan amount, payable at closing, though it can be financed into the loan. The annual MIP varies depending on the loan amount, term, and loan-to-value (LTV) ratio, typically ranging from 0.15% to 0.75% in 2025. This annual premium is paid monthly as part of the mortgage payment.

The duration for which FHA MIP is paid depends on the loan’s characteristics and origination date. For FHA loans originated on or after June 3, 2013, if the initial down payment was less than 10%, the annual MIP is generally required for the entire loan term. However, if the down payment was 10% or more, the annual MIP can be removed after 11 years. For loans originated between January 2001 and June 3, 2013, MIP is typically canceled once the loan’s LTV reaches 78%.

In contrast, VA loans, guaranteed by the Department of Veterans Affairs, do not require ongoing monthly mortgage insurance. Instead, they typically include a one-time VA Funding Fee, which helps offset the cost to taxpayers and keeps the VA loan program sustainable. This fee is paid at closing and can range from 0.5% to 3.6% of the loan amount, varying based on the loan type (e.g., purchase, refinance), the amount of down payment, and whether it is the veteran’s first or subsequent use of a VA loan benefit. For example, a first-time VA loan user with no down payment on a purchase loan might pay a funding fee of 2.15%.

The VA Funding Fee can be rolled into the loan amount, increasing the overall loan balance but reducing upfront out-of-pocket costs at closing. However, certain eligible veterans and service members are exempt from paying this fee. Exemptions typically apply to:

• Veterans receiving compensation for service-connected disabilities
• Those who would receive such compensation but are drawing retirement or active-duty pay
• Purple Heart recipients
• Surviving spouses of veterans who died in service or from service-connected disabilities

Automatic PMI Removal

For conventional loans, the Homeowners Protection Act (HPA) of 1998, also known as the PMI Cancellation Act, provides guidelines for the automatic termination of Private Mortgage Insurance. This federal law was enacted to ensure that borrowers are not required to pay PMI indefinitely once they have built sufficient equity in their homes. The HPA applies to most conventional loans originated after July 29, 1999.

Automatic PMI termination occurs at two primary points, provided the borrower is current on their mortgage payments. The first instance is when the loan-to-value (LTV) ratio, based on the original value of the home, reaches 78%. This calculation relies on the initial amortization schedule, meaning the scheduled payments, rather than any additional principal payments the borrower might have made. Lenders are required to automatically cancel PMI at this 78% LTV threshold.

The second automatic termination point mandated by the HPA occurs when the loan reaches the midpoint of its amortization period. For example, on a 30-year mortgage, the midpoint would be after 15 years. This termination happens regardless of the outstanding loan balance, as long as the borrower is current on their payments at that time. If the borrower is not current, PMI will be terminated on the first day of the month following the date they become current.

It is important for borrowers to understand that these automatic termination rules are based on the original property value and the scheduled amortization. While making extra payments can help reach the 78% LTV ratio sooner, the automatic cancellation under HPA typically adheres to the original schedule. Lenders are also required to notify borrowers annually about their rights regarding PMI cancellation and termination.

Proactive PMI Cancellation

While Private Mortgage Insurance (PMI) is automatically terminated under federal law at a specific loan-to-value (LTV) ratio or loan midpoint, borrowers can often proactively request its cancellation sooner. This initiative allows homeowners to potentially remove PMI before the scheduled automatic termination, leading to reduced monthly housing expenses. The ability to do so depends on meeting specific criteria set by the lender and federal guidelines.

To proactively cancel PMI, borrowers typically need to demonstrate that their LTV ratio has reached 80% of the home’s original value. The “original value” is generally defined as the lesser of the sales price or the appraised value at the time the loan was originated. If the home has appreciated significantly in value since the purchase, borrowers may be able to use the current appraised value to reach the 80% LTV threshold faster. In such cases, the lender will likely require a new appraisal to confirm the property’s updated market value.

A good payment history is another essential requirement for borrower-initiated PMI cancellation. Lenders typically require that the borrower has no payments 30 days or more past due in the preceding 12 months, and no payments 60 days or more past due in the preceding 24 months. Additionally, the property should not have any subordinate liens, such as a second mortgage or home equity line of credit, which could impact the lender’s risk exposure.

The process for proactive cancellation usually involves submitting a written request to the loan servicer. If relying on increased home value, the borrower will often be responsible for the cost of the new appraisal, which typically ranges from $400 to $700 for a standard single-family home. Although this is an upfront expense, successfully removing PMI can lead to substantial savings over time, often recouping the appraisal cost within a few months.