What Is PMI in a Conventional Loan? Explained Simply

Buying a home with a conventional loan? If your down payment is less than 20%, you'll likely encounter something called PMI—Private Mortgage Insurance. PMI is one of the most misunderstood parts of the mortgage process for many homebuyers, especially first-timers. But don't worry—we'll walk you through exactly what PMI is, why lenders require it, how much it costs, and how you can avoid or remove it.

Let's break it down.

What Is PMI in a Conventional Loan?

PMI (Private Mortgage Insurance) is a policy that protects your lender—not you—if you stop making mortgage payments. It's most commonly required when your down payment is less than 20% on a conventional loan.

With less equity in the home, you're viewed as a higher risk. PMI gives lenders a financial cushion in case of default. However, while the lender benefits from PMI, the borrower pays the monthly premiums.

Why Is PMI Required?

Lenders use PMI for risk management. Data shows loans with less than 20% equity are more likely to default. PMI reduces their exposure and allows them to offer loans with smaller down payments—so while it adds Cost, it opens doors for buyers with limited upfront funds.

PMI Insurance Premium: What Are the Costs?

PMI typically ranges between 0.3% to 1.5% of the original loan amount annually, depending on factors like:

• Your credit score
• Loan-to-value (LTV) ratio
• Loan amount
• Loan term

For a $300,000 loan, you could pay anywhere from $75 to $375 per month just for PMI.

How to Avoid PMI on a Conventional Loan

Avoiding PMI can help reduce your monthly mortgage payment and save thousands. Here are your options:

1. Put Down 20%

The simplest way to avoid PMI is to put 20% down on your home. This keeps your LTV ratio at or below 80% and removes the need for PMI.

2. Consider Lender-Paid Mortgage Insurance (LPMI)

With LPMI, the lender pays your mortgage insurance upfront—but charges you a higher interest rate. This can simplify payments but may cost more in the long run. It's best to run the numbers carefully.

3. Use a Piggyback Loan (80-10-10 Strategy)

This Strategy uses two loans and a small down payment:

• 80%: Primary Mortgage
• 10%: Second mortgage (usually a HELOC or home equity loan)
• 10%: Down payment

It helps avoid PMI while still getting into a home with less than 20% down.

Should You Always Avoid PMI?

Not necessarily. Sometimes, paying PMI for a few years makes more sense than taking on a second loan or waiting to save 20%. If home prices are rising, buying now—even with PMI—could save you long-term money.

PMI Rules: When and How Can You Remove It?

Good news: Unlike FHA mortgage insurance, PMI doesn't have to last forever.

Automatic Removal at 78% LTV

By law, your lender must automatically cancel PMI when your loan reaches 78% of the original property value, assuming your payments are current.

Request Removal at 80% LTV

You can request PMI cancellation earlier—once your LTV hits 80%. To do this:

• Send a written request to your lender
• Be up to date on payments
• Provide proof of the home's current value (usually via an appraisal)
  
  

Writing a PMI Cancellation Letter

A PMI cancellation letter should include the following:

• Your loan number
• Property address
• Statement requesting Removal
• Documentation, if required (appraisal, payment history)
  
  

PMI and Refinancing: A Strategic Alternative

If your home value has increased significantly, refinancing your mortgage might help you eliminate PMI.

How Refinancing Works

When you refinance, you take out a new loan to replace your current one. PMI won't be required if your new loan's LTV is 80% or less.

When It Makes Sense

Refinancing is a smart move when:

• Your home is appreciated
• Your credit score has improved
• You can qualify for a lower interest rate
• You plan to stay in the home long enough to offset closing costs
  
  

PMI vs Second Mortgage: Which One Should You Choose?

Is it better to pay PMI or take out a second mortgage? Both can help you buy with less money, but they work differently.

What Is a Second Mortgage?

A second mortgage (like a HELOC or home equity loan) is an additional loan that covers part of your down payment. It typically has a higher interest rate and is repaid separately.

Choose PMI if you want simplicity and plan to cancel it soon. Choose a second mortgage if you can handle more complexity and want to avoid insurance payments altogether.

PMI Mortgage vs FHA Mortgage Insurance: What's the Difference?

It's easy to confuse PMI with FHA mortgage insurance (MIP), but they differ.

If you qualify for a conventional loan, PMI is often cheaper and more flexible. FHA loans are better for those with lower credit or less savings.

Final Thoughts: Is PMI Worth It?

PMI often gets a bad rap—but it's not always a bad deal. It enables buyers to become homeowners sooner without waiting to save 20%.

Recap:
second loans,

• PMI in a conventional loan is required when your down payment is under 20%.
• It protects the lender, but the borrower pays it.
• You can remove PMI once you build equity or refinance.
• Sometimes, paying PMI is better than waiting or taking a second loan.
  
  

Want to avoid PMI or learn how to remove it faster? Speak to a mortgage advisor to run the numbers. And don't forget to explore tools like our PMI calculator to see how it fits into your home-buying plan.