What is PMI and why do I have to pay it?

Private Mortgage Insurance (PMI) is insurance that protects the lender -- not you -- if you default on the loan with less than 20% down payment. Lenders require it because loans with less than 20% down have a higher default risk. The premiums are paid by the borrower. PMI is not a permanent cost -- it can be cancelled once you reach 20% equity through principal paydown or home appreciation.

How can I get PMI removed from my loan?

For conventional loans: (1) Reach 80% LTV through regular payments and request cancellation in writing from your servicer. (2) If your home has appreciated, request a new appraisal -- if the current LTV is below 80%, you can request immediate cancellation. (3) PMI is automatically cancelled by federal law when the scheduled balance reaches 78% LTV. For FHA loans: PMI cannot be cancelled for loans with less than 10% down -- you must refinance to a conventional loan once you have 20% equity.

Should I put 20% down to avoid PMI or buy sooner with a smaller deposit?

This depends on the housing market and your financial situation. In an appreciating market, buying earlier with PMI and building equity can be better than waiting. Calculate: (1) PMI total cost until you reach 80% LTV, (2) Rent you would pay while saving the extra deposit, (3) Appreciation you would miss by delaying. In many markets, the delayed purchase scenario costs more than the PMI itself.

PMI Calculator — Free Real Estate Calculator

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US buyer has 12% down on a $480,000 home. The lender mentioned PMI but the buyer doesn't know what it is, how much it costs or when it stops. You need the monthly cost, the total bill and the drop-off date before they sign the loan disclosure.

PMI Calculator

Insurance

Land value ($)

Unimproved land value (from council rates notice)

State

Property type

Land tax applies to investment and holiday properties — not your primary residence.
Thresholds (approx 2024): NSW $1.075M · VIC $300K (2024 threshold) · QLD $600K · WA $300K · SA $723K · TAS $25K · ACT (varies)
Rates are applied progressively above the threshold. Foreign owners face additional surcharges in most states.

Reference: Revenue NSW — Land Tax

ℹ️ Results are estimates for planning purposes. Verify with current standards and a qualified professional.

1 What this calculator does

Calculates Private Mortgage Insurance (PMI) monthly cost, annual cost and estimated drop-off date for US buyers with less than 20% down payment. Uses credit score-based PMI rate tiers and estimates when LTV reaches 80% through a combination of principal paydown and appreciation.

2 Formula & professional reasoning

PMI monthly = Loan amount x Annual PMI rate / 12
LTV = Loan balance / Property value
PMI required when LTV > 80% (deposit < 20%)
PMI drops when LTV reaches 80% through:
  (a) Regular principal repayments, or
  (b) Property appreciation reducing the LTV ratio

PMI rates in the US are tiered by credit score and LTV ratio. Borrowers with excellent credit (760+) pay approximately 0.2-0.5% of the loan per year. Borrowers with fair credit (620-679) pay 0.7-1.5% per year. PMI automatically terminates by law (Homeowners Protection Act) when the loan is scheduled to reach 78% LTV based on the original amortisation schedule. However borrowers can request cancellation at 80% LTV -- which arrives earlier when property appreciates.

3 Worked examples

⚠️ Illustrative example only — not clinical or professional instruction.

Basic

12% down, good credit -- PMI cost and drop-off

Given: Purchase price: $480,000 | Down payment: $57,600 (12%) | Credit score: 720-759 | Property growth: 4%/yr

Working:

Loan: $422,400 | PMI rate (720-759 credit): approx 0.58% | Monthly PMI: $422,400 x 0.0058 / 12 = $204 | LTV: $422,400 / $480,000 = 88% | PMI drops when LTV reaches 80%

Answer: Monthly PMI: $204 | Annual PMI: $2,448 | Drop-off: approximately 4-5 years at 4% growth

💡 Total PMI cost over 4.5 years: approximately $11,000. This is the price of not having a 20% down payment -- not insignificant but often less than the opportunity cost of waiting to save 20%.

Standard

5% down -- how much does PMI cost and when does it end?

Given: Purchase price: $380,000 | Down payment: $19,000 (5%) | Credit score: 760+ | Growth: 5%/yr

Working:

Loan: $361,000 | PMI rate (excellent credit): 0.20% | Monthly PMI: $361,000 x 0.002 / 12 = $60 | LTV: 95% | Path to 80% LTV through growth and paydown

Answer: Monthly PMI: $60 | Annual: $720 | Drop-off: approximately 3-4 years at 5% growth + paydown

💡 Excellent credit and high appreciation makes 5% down surprisingly affordable in PMI terms -- $60/month until LTV reaches 80%. The bigger risk is being house-poor with a 5% down payment and no emergency fund.

Advanced

PMI vs larger down payment -- which is better?

Given: Scenario A: 10% down ($48,000), PMI $170/mo for 5 years | Scenario B: 20% down ($96,000), no PMI

Working:

Extra deposit in Scenario B: $48,000 more upfront | PMI paid in Scenario A: $170 x 60 = $10,200 | Opportunity cost of extra $48,000 at 7% return over 5 years: $48,000 x (1.07^5-1) = $19,344

Answer: Scenario B: saves $10,200 in PMI but foregoes $19,344 in investment returns | Net: Scenario A (10% down + PMI) is better by $9,144 if you invest the difference

💡 Counterintuitively, a smaller down payment with PMI can be better than a larger down payment -- if the difference is invested at a higher return than the PMI rate. The decision depends heavily on discipline to actually invest the difference.

4 Sanity check

PMI rate ranges by credit score (approximate)

760+ excellent: 0.20-0.50%/yr | 720-759 good: 0.40-0.80%/yr | 680-719 fair: 0.70-1.20%/yr | 620-679 poor: 1.00-1.50%/yr

PMI cancellation rights (Homeowners Protection Act)

Automatic cancellation at 78% LTV (scheduled) | Request cancellation at 80% LTV | Must be on time with payments and request in writing

FHA vs conventional loan PMI

FHA loans charge MIP (Mortgage Insurance Premium) for the life of the loan for <10% down | Conventional PMI can be cancelled | FHA is often better for lower credit scores but worse long-term

SALT deduction cap

PMI premiums are NOT directly deductible at the federal level for most borrowers (deduction phased out based on income)

5 Common errors

Error	Cause	Consequence	Fix
Assuming PMI cancels automatically at 80% LTV	Not understanding the Homeowners Protection Act requirements	Continuing to pay PMI months after qualifying for cancellation	PMI cancels automatically at 78% LTV based on the original schedule, but you can REQUEST cancellation at 80% LTV in writing. If your home has appreciated significantly, request a new appraisal -- you may qualify for earlier PMI removal based on current value.
Confusing FHA MIP with conventional PMI	Treating all mortgage insurance the same	Expecting PMI to be cancellable on an FHA loan with less than 10% down -- it cannot be	FHA loans charge Mortgage Insurance Premium (MIP) for the life of the loan if you put less than 10% down. The only way to remove FHA MIP is to refinance to a conventional loan once you have 20% equity.
Not comparing the true cost of PMI to the cost of saving a larger down payment	Treating PMI as purely a waste of money	Delaying purchase to save 20% while renting -- potentially worse financial outcome depending on market	Compare the PMI cost, the opportunity cost of a larger down payment and the cost of continued renting. In appreciating markets, buying earlier with PMI often beats waiting to save 20%.
Not requesting PMI cancellation when LTV reaches 80%	Assuming the lender will cancel it automatically	Continuing to pay PMI for months or years after qualifying	PMI auto-cancels at 78% LTV by federal law. However you should proactively request cancellation in writing when you reach 80% LTV -- contact your servicer and confirm what documentation they need.

6 Reference & regulatory links

🇦🇺 Australia

🇺🇸 United States

7 Professional workflow

Common tools used alongside this one:

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Mortgage Affordability Calculator

Mortgage Affordability shows how much you can borrow -- PMI Calculator shows the additional monthly cost of borrowing with less than 20% down

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First Home Buyer Cost Summary

First Home Buyer Cost Summary (AU equivalent) shows LMI; PMI Calculator is the US equivalent

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Refinance Break-Even Calculator

Once equity reaches 20%, refinancing may remove PMI permanently if the lender requires it rather than cancellation

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Input	Result
Excellent credit (760+)	PMI approx 0.20-0.50%/yr
Good credit (720-759)	PMI approx 0.40-0.80%/yr
PMI cancellation	Request at 80% LTV \| Auto at 78% LTV
FHA MIP	Cannot cancel if <10% down -- only refinance