What Is PMI and When Does It Go Away?

PMI — private mortgage insurance — is a monthly premium you pay on a conventional loan when your down payment is under 20%. It protects the lender, not you, and it isn’t permanent: you can typically request cancellation once you reach 20% equity (78% loan-to-value triggers automatic termination on most conventional loans), or shed it earlier by refinancing or documenting that your home’s value has risen.

That one sentence contains the two things buyers most often get wrong: PMI insures the lender against your default, and it’s a phase, not a life sentence.

Why lenders charge it

A loan with 5% down is statistically riskier than one with 20% down — there’s less of the borrower’s own money between the lender and a loss. PMI transfers that extra risk to an insurer, with you paying the premium. That’s the trade that makes low-down-payment conventional loans possible at all, which is why PMI, for all the grumbling, is the tool that lets many buyers stop renting years earlier than a 20%-down rule would allow.

In a market at Seattle prices, this matters more than in cheap metros: 20% down on an illustrative $800,000 house is $160,000. Waiting to save that while prices and rents move is its own cost. Paying PMI to buy sooner is often the rational move — it just shouldn’t be paid a month longer than necessary.

What it costs, roughly

PMI is priced on your loan-to-value ratio and credit score, commonly landing somewhere around a fraction of a percent to roughly 1% of the loan amount per year, paid monthly. As a rough illustration, on a $700,000 loan that can mean a few hundred dollars a month — real money, but smaller than many buyers assume, and it shrinks as your equity grows. Run your own numbers in our mortgage calculator with PMI toggled on and off to see the actual monthly difference at your price point.

Note for completeness: FHA loans carry their own mortgage insurance with different (often stickier) removal rules — if you’re choosing between FHA and conventional, the insurance exit path is a legitimate deciding factor to walk through with your lender.

The three exits

1. Request at 20% equity (80% LTV). Once your balance is paid down to 80% of the home’s original value, you can ask your servicer in writing to cancel. Expect them to require a decent payment history and possibly a valuation.
2. Automatic at 78% LTV. Federal rules require conventional-loan PMI to terminate automatically once you amortize down to 78% of original value (current on payments). This is the do-nothing backstop — fine, but slower than acting yourself.
3. Appreciation or improvements. Here’s the underused one, especially in appreciating Puget Sound neighborhoods: if your home’s current value has risen enough that your loan is at or below the threshold, you can often petition for removal with a new appraisal, on the servicer’s terms — typically with some seasoning time on the loan. Buyers who bought with 10% down and rode a few years of appreciation frequently qualify earlier than their amortization schedule says.

A refinance also resets the math entirely — useful if rates have moved in your favor anyway, expensive if removal was the only motive.

What to actually do

• Buying now: don’t treat 20% down as a moral requirement. Compare total monthly cost with PMI against what waiting costs you; also ask your lender to price lender-paid PMI and piggyback options against the standard version rather than assuming.
• Already paying PMI: find your current LTV today (balance ÷ a realistic current value — a CMA-style comp check beats a guess). If you’re near 80%, call the servicer and ask for their exact removal requirements in writing. The phone call is free; the inertia isn’t.
• Calendar the milestone. Servicers honor the rules; they don’t always volunteer them early.

PMI is one of several “invisible” line items in a home purchase — agent fees are another. Manaky Homes makes that one visible: Greater Seattle agents publish their fees side by side, free to browse. Join the waitlist.