PMI is the financial mechanism that makes low-down-payment conventional loans economically viable for lenders. Without PMI, lenders would require 20% down on every conventional loan to protect themselves against default risk. PMI lets borrowers put down 3-19% and still qualify, with the borrower paying the insurance premium that protects the lender.
How PMI is structured
- Borrower-Paid Monthly PMI — most common. Monthly premium added to PITI payment until LTV drops to qualifying threshold
- Borrower-Paid Single Premium PMI — borrower pays a one-time upfront premium at closing, no monthly cost. Sometimes called “lump-sum PMI”
- Lender-Paid PMI (LPMI) — lender pays the PMI premium in exchange for charging the borrower a higher interest rate. The cost is built into the rate rather than a separate monthly line item
- Split-Premium PMI — combination of upfront and monthly premium. Less common
PMI cancellation rules (HPA)
The Homeowners Protection Act (HPA) governs when and how PMI must be cancelled:
- Borrower request at 80% LTV — borrower can request PMI cancellation when the LTV reaches 80% based on either original purchase price or current appraised value (with current appraisal). Lender must comply if the loan is current and there’s no second lien
- Automatic termination at 78% LTV — lender must automatically cancel PMI when scheduled LTV reaches 78% based on original amortization schedule, regardless of current home value
- Final termination at midpoint — lender must cancel PMI at the midpoint of the original loan term, even if LTV hasn’t reached 78%
PMI vs MIP vs MI
- PMI — Private Mortgage Insurance, on conventional loans
- MIP — Mortgage Insurance Premium, on FHA loans (different rules; lifetime in most cases)
- MI — generic term for both PMI and MIP
Why PMI removal is a refi/recapture motion
When a borrower’s LTV drops below 80% (through home appreciation or paydown), they become eligible for PMI removal. Most borrowers don’t know this and don’t proactively request it. An LO who alerts the borrower at the threshold crossing is delivering meaningful value, even if the borrower doesn’t end up refinancing. It’s also a natural moment to discuss other refi opportunities (rate-and-term, cash-out).
