How Private Mortgage Insurance on Home Loans Work

This guide covers how private mortgage insurance on home loans work. Private mortgage insurance on home loans, also referred to as PMI, is paid by the borrower to benefit lenders. PMI is a mortgage insurance program that is created to protect lenders from default and loss from borrowers defaulting on conventional loans. John Strange, a senior mortgage loan originator at Mortgage Lenders for Bad Credit says the following about how private mortgage insurance on home loans work as follows:

Lenders require anyone with less than 20% equity on conventional loans to purchase PMI. Private mortgage insurance on home loans is the conventional mortgage insurance version of HUD’s mortgage insurance premium.

Homebuyers who put at least 20% or more down payment on home purchases do not need PMI. Any loan-to-value greater than 80% requires private mortgage insurance on conventional mortgage loans. There are variables on how much borrowers pay for private mortgage insurance on conventional loans. The FHA annual mortgage insurance premium is at a fixed rate of 0.55% annually based on the loan balance. Private mortgage insurance on conventional loans is dependent on various factors such as the borrower’s credit scores, type of property, loan-to-value, and other variables. In the following paragraphs, we will cover how private mortgage insurance on home loans work. Here’s a clear and detailed explanation of how Private Mortgage Insurance (PMI) works on home loans as of March 26, 2025. PMI is a common feature for borrowers who put less than 20% down on a conventional mortgage, and it’s designed to protect the lender—not you—if you default. Let’s break it down.

What Is Private Mortgage Insurance (PMI)?

• Definition: PMI is an insurance policy that covers a portion of the lender’s loss if you stop paying your mortgage and the home is foreclosed.
• Who It Protects: The lender, not the borrower. If the home sells for less than the loan balance in foreclosure, PMI helps cover the gap.
• When It’s Required: On conventional loans (backed by Fannie Mae or Freddie Mac) when your Down Payment is less than 20% of the home’s purchase price or appraised value.

How Private Mortgage Insurance (PMI) Works

Trigger

• You buy a $300,000 home with 10% down ($30,000).
• Your loan is $270,000, giving you a loan-to-value (LTV) ratio of 90% ($270,000 ÷ $300,000).
• Since LTV is> 80%, PMI kicks in.

Cost of Private Mortgage Insurance

• PMI premiums vary based on loan size, credit score, and LTV.
• Range: annually 0.5% to 1.5% of the original loan amount.
• Example: For a $270,000 loan at 0.8% PMI, you pay $2,160/year or $180/month.
• Payment: This is typically added to your monthly mortgage payment (principal, interest, taxes, insurance—PITI), though some lenders offer upfront or lender-paid options (more on that below).
• Duration: PMI stays until your LTV drops to 78% (based on the original home value), either through payments or home appreciation, unless you cancel it earlier at 80% LTV.

PMI Cost Factors

• Credit Score: Higher scores mean lower PMI. For example, 760+ might get 0.5%, and 620 might hit 1.2%.
• LTV Ratio: 95% LTV (5% down) costs more than 85% LTV (15% down).
• Loan Type: Fixed-rate loans often have lower PMI than adjustable-rate mortgages (ARMs).
• Loan Amount: Larger loans may increase the rate slightly.

Payment Options

Monthly PMI

• The most common is rolled into your escrow payment.
• Example: $180/month on that $270,000 loan.

Upfront PMI

• Pay a lump sum at closing (e.g., 1-2% of loan = $2,700-$5,400).
• Non-refundable, even if you pay off early.

Lender-Paid PMI (LPMI)

• The lender covers PMI for a higher interest rate (e.g., 6.5% vs. 6.2%).
• There is no separate PMI fee, but you pay more interest over time, which is good if you sell or refinance soon.

Split Premium

• Part upfront, part monthly (e.g., $1,000 at closing + $90/month).

How to Remove private mortgage insurance (PMI)

• PMI isn’t forever—here’s how it ends:

Automatic Termination of private mortgage insurance

• When your LTV hits 78% based on the original amortization schedule (e.g., after ~9 years on a 30-year loan with 10% down).
• Lenders must drop it by law (Homeowners Protection Act of 1998).

Borrower-Requested Cancellation of private mortgage insurance

At 80% LTV, you can request removal if:

• You’ve paid on time (no 30-day lates in the past year).
• You prove the value (via appraisal, ~$300-$500 cost) hasn’t dropped below the original purchase price.

Example: $270,000 loan, paid down to $216,000 ($300,000 x 80%), request PMI off.

private mortgage insurance: Refinance

• If home value rises (say, $300,000 to $350,000), refinance with 20%+ equity to ditch PMI.

Pay Off Early of private mortgage insurance

• Extra principal payments speed you to 80% LTV.

private mortgage insurance (PMI) vs. FHA mortgage insurance premium (MIP)

• PMI: Removable at 80% LTV for conventional loans.
• Mortgage Insurance Premium (MIP): For FHA loans, required for the life of the loan (if <10% down) or 11 years (if 10%+ down).
• MIP rates as of 2025: 0.45%-0.85% annually.

Example in Action of private mortgage insurance

• Home: $300,000, 5% down ($15,000), loan $285,000.
• PMI: 0.9% = $2,565/year or $213.75/month.
• Monthly Payment: $1,710 (6.2% rate) + $213.75 PMI + $250 taxes/insurance = ~$2,174.
• Removal: At 80% LTV ($240,000 owed), PMI drops after ~6 years or sooner with appreciation/extra payments.

Pros of private mortgage insurance

• Enables homeownership with less cash upfront (5-10% vs. 20%).
• Temporary cost—unlike FHA MIP, it’s not permanent.

Cons Of private mortgage insurance

• Adds $100-$300/month to your Payment.
• There is no direct benefit to you—purely lender protection.
• Upfront or LPMI options can cost more in the long term.

Current Trends (March 2025) private mortgage insurance

With 30-year fixed rates at 6.2%, PMI remains a hurdle for affordability—median home prices ($420,000) mean even 10% down leaves hefty loans needing PMI. According to industry data, about 15% of new conventional loans in 2025 carry PMI, down slightly as rising equity from 2020’s appreciation helps some avoid it.

Avoiding Private Mortgage Insurance

• 20% Down: No PMI needed.
• Piggyback Loan: 80/10/10 structure (80% first mortgage, 10% second loan, 10% down)—rates on the second loan (e.g., 8%) may beat PMI costs.
• Lender-Paid PMI: Higher rate, no PMI fee.
• VA/FHA: Alternatives with their own insurance rules.
• PMI’s a trade-off: it gets you in the door but pads your Payment.
• It’s worth it if you can’t hit 20% down and want to buy now.
• How much are you planning to put down?

HUD Mortgage Insurance Premium

FHA loans are government-backed home mortgage loans. FHA loans are guaranteed by HUD, the parent of FHA. HUD has a one-time, fixed, upfront mortgage insurance premium of 1.75%, which can be rolled into the balance of the FHA loan. HUD also has a lifetime 0.55% annual HUD mortgage insurance premium on the life of all 30-year fixed-rate mortgages. No matter what the loan-to-value is on an FHA loan, the annual FHA MIP is charged on all 30-year fixed-rate mortgages. The only way the FHA MIP can be removed is by either paying off the FHA loan or refinancing the FHA loan to a conventional loan.

Types of FHA Mortgage Insurance Premium

Homebuyers seeking FHA loans are required to pay mandatory FHA mortgage insurance premiums. Borrowers need to pay a one-time upfront 1.75% mortgage insurance premium. Borrowers also pay a 0.55% annual mortgage insurance premium on the balance for the life of all 30-year fixed-rate FHA loans.

The 1.75% upfront mortgage insurance premium is added to the balance of the original mortgage loan. The home buyer does not have to come up with it upfront at the time of closing.

The 0.55% HUD annual mortgage insurance premium will always be charged for the life of the loan. The only way this 0.55% annual HUD mortgage insurance premium can be eliminated is by the homeowner refinancing the FHA loan into a conventional loan or by selling their home and paying off the balance of their FHA loan.

Conventional Loan Private Mortgage Insurance

Private mortgage insurance on conventional loans is a totally different apple compared to FHA mortgage insurance premium. Whether borrowers have good credit, bad credit, high debt-to-income ratios, low debt-to-income ratios, compensating factors, or any other positive or negative factors, the FHA mortgage insurance premium will remain at a constant 0.55% of the mortgage balance amount. With conventional loans, it is different. Everyone’s private mortgage insurance premium varies depending on several factors. It is common sense that the higher the loan-to-value is, the higher the risk the loan is. This is because the smaller down payment borrowers have less skin in the game. However, the loan-to-value is not the only factor that determines private mortgage insurance premiums.

Factors Affecting Premiums On Private Mortgage Insurance

 

The amount of the private mortgage insurance factor and the amount of PMI are determined by other factors such as the following:

• credit scores
• debt-to-income ratios
• type of property

PMI is different for the following:

• purchasing condo, townhome
• single-family home
• 2- to 4-unit family homes

No Private Mortgage Insurance on Home Loans With Lender-Paid Mortgage Insurance

Many lenders will give conventional borrowers an option where no private mortgage insurance is required for conventional mortgage loans with higher than 80% loan-to-value with LPMI. This is called lender-paid mortgage insurance. Referred to it as LPMI, and there are no monthly private mortgage insurance premiums required to be paid by the mortgage borrower. There is another private mortgage insurance program called single premium mortgage insurance for conventional loans. Single-Premium Financed Mortgage Insurance: A single-premium financed mortgage insurance is similar to FHA upfront mortgage insurance premium. A larger upfront premium is charged, and the upfront premium is added to the balance of the mortgage loan. 

How Does Lender-Paid Mortgage Insurance on Conventional Loans Work

Lender Paid Mortgage Insurance (LPMI) is a conventional mortgage program where borrowers do not have to pay monthly PMI: There are two types of LPMI: Lender Paid Mortgage Insurance: LPMI With lender-paid mortgage insurance, it takes the risk on the conventional loan in lieu of charging the mortgage borrower a slightly higher mortgage rate. The higher mortgage rate charged on the borrower is determined by the borrower’s risk factor, which is determined by evaluating the borrower’s:

• loan-to-value
• credit scores
• credit history
• debt-to-income ratios
• reserves
• other determinants.

Monthly private mortgage insurance: The most common form of private mortgage insurance is the monthly private mortgage insurance program. The borrower pays a constant private mortgage insurance premium until the loan-to-value on their mortgage loan drops to 78%. John Strange of Mortgage Lenders for Bad Credit says the following about private mortgage insurance:

Unlike FHA mortgage insurance premiums, where borrowers cannot eliminate the 0.55% annual FHA mortgage insurance premium, conventional private mortgage insurance can be canceled as long as owners have had private mortgage insurance for at least two years and have a loan-to-value at 78% LTV or less.

Determining the value of the property is done by getting a new appraisal. If the subject property has not gone up in value, borrowers can pay down the loan so that they meet the 78% loan-to-value and can then cancel their mortgage insurance premium. The one-time upfront LPMI is a PMI program where borrowers pay a one-time upfront PMI and do not have monthly private mortgage insurance on their conventional loans.

Private Mortgage Insurance Providers

There are several private mortgage insurance companies where most mortgage lenders can get quotes from. All private mortgage insurance companies underwrite every mortgage application similar to how mortgage lenders underwrite their mortgage loan applications A private mortgage insurance company can deny insuring a mortgage loan. If this happens, the mortgage lender takes it to a different private mortgage insurance provider. Borrowers’ credit, type of property, and loan-to-value are taken into consideration in determining PMI.

Qualifying With Lender With No Overlays

Homebuyers who need to qualify for a mortgage with a national direct lender with no overlays on government and conventional loans can contact us at Mortgage Lenders for Bad Credit at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Mortgage Lenders for Bad Credit is available 7 days a week, evenings, weekends, and holidays.