Private Mortgage Insurance (PMI) Explained: Calculation & Elimination Guide
Learn how PMI is calculated, when it applies, how to eliminate it early, and how it impacts your monthly mortgage payment.
By Sarah Jenkins, CFA
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Reviewed by David Vance, CFP
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5 min read
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) is a risk-mitigation fee paid by conventional loan borrowers who make a down payment of less than 20% of the home's purchase price. PMI protects the lender—not the homebuyer—in the event of loan default.
How PMI is Calculated
PMI rates typically range between 0.3% and 1.5% of the original loan balance annually, depending on your credit score, Loan-to-Value (LTV) ratio, and loan term.
Monthly PMI Calculation Formula
Monthly PMI = (Original Loan Balance × Annual PMI Rate) ÷ 12
How to Eliminate PMI
- Automatic Cancellation: Under the Homeowners Protection Act, lenders must automatically cancel PMI when your balance reaches 78% of the original home value.
- Requested Cancellation: You can request PMI removal once your loan balance reaches 80% LTV.
- Home Appreciation Re-Appraisal: If local property values rise significantly, a new appraisal showing 20% equity can eliminate PMI early.