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If you’re buying a home with less than 20% down on a conventional loan, chances are you’ve heard the term PMI come up. For a lot of buyers, it feels like an unavoidable extra cost — something you just accept and pay indefinitely.
But PMI isn’t permanent, and understanding exactly how it works can save you a significant amount of money over the life of your loan. Here’s everything you need to know.
PMI stands for Private Mortgage Insurance. It’s a type of insurance policy that protects your lender — not you — in the event that you default on your loan. When you put less than 20% down on a conventional loan, lenders consider the loan higher risk, and PMI is their way of offsetting that risk.
It’s important to understand that distinction: PMI benefits the lender, not the borrower. You pay for it, but it provides you no direct protection or coverage. That’s exactly why removing it as soon as you’re eligible is in your best financial interest.
On a conventional loan, PMI is required any time your down payment is less than 20% of the home’s purchase price. The specific cost depends on several factors including your credit score, loan amount, and down payment size.
PMI typically runs between 0.5% and 1.5% of your loan amount annually. On a $300,000 loan, that translates to roughly $125 to $375 added to your monthly mortgage payment — a meaningful cost worth understanding and planning around.
This is where conventional loans have a significant advantage over FHA loans.
Conventional Loan PMI is temporary. Once you build enough equity in your home, you can have it removed — saving you potentially hundreds of dollars per month going forward.
FHA Mortgage Insurance Premium (MIP) is different. On most FHA loans, mortgage insurance stays for the entire life of the loan regardless of how much equity you build. The only way to eliminate FHA mortgage insurance is to refinance into a conventional loan once you qualify.
This distinction is one of the biggest reasons well-qualified buyers often choose conventional over FHA — the long-term savings can be substantial.
There are several ways to get rid of PMI, and knowing all of them puts you in a stronger position:
Option 1 — Request Removal at 20% Equity
Once your loan balance drops to 80% of your home’s original purchase price (meaning you’ve built 20% equity through your monthly payments), you can formally request that your lender cancel PMI. This doesn’t happen automatically — you need to submit a written request and may need to confirm your payment history is in good standing.
Option 2 — Automatic Cancellation at 22% Equity
Under the federal Homeowners Protection Act, your lender is legally required to automatically cancel PMI once your loan balance reaches 78% of the original purchase price, based on your original amortization schedule. You don’t need to request this — it happens automatically as long as your payments are current.
Option 3 — New Appraisal Based on Increased Home Value
If your home has appreciated significantly in value since you purchased it, you may be able to reach 20% equity faster than your payment schedule would suggest. In this case, you can request a new appraisal to establish the current market value. If the appraisal confirms you have at least 20% equity based on the current value, you may be able to request PMI removal ahead of schedule. Lender policies on this vary, so it’s worth asking directly.
Option 4 — Refinance Into a New Loan
If interest rates have dropped or your home’s value has increased substantially, refinancing into a new conventional loan at 80% or less of the current appraised value eliminates PMI on the new loan entirely. This option also applies to FHA borrowers who want to remove mortgage insurance that would otherwise stay for the life of the loan.
Option 5 — Make Extra Principal Payments
Paying down your principal faster than your regular schedule builds equity more quickly, moving you toward the 20% threshold sooner. Even modest extra payments each month can shorten your PMI timeline meaningfully.
The savings depend on your loan amount and PMI rate, but here’s a real-world sense of the impact:
On a $300,000 loan with a PMI rate of 0.8% annually, you’re paying $200 per month in PMI. Over two years, that’s $4,800. Over five years, $12,000. Getting to 20% equity and removing PMI as soon as you’re eligible is one of the simplest ways to reduce your monthly housing costs without refinancing.
If you already have a conventional loan with PMI, it’s worth checking where you stand:
If you’re still in the process of buying and weighing your down payment options, a local loan officer can show you exactly when PMI would drop off at different down payment levels, so you can factor that into your decision.
For a full overview of conventional loan requirements and benefits, visit our Conventional Loans page.
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