A first-time buyer in 2025 put down a median of 10% on their home, the highest down payment that group has managed since 1989, according to the National Association of Realtors’ 2025 Profile of Home Buyers and Sellers. Even at that level, 10% is only half of the traditional 20% threshold, which means a large share of new buyers are paying for something most of them never asked about and few fully understand: private mortgage insurance.
Private mortgage insurance, almost always shortened to PMI, is the premium a conventional-loan borrower pays when they put down less than 20%. Understanding what it is, what it costs, and the specific point at which the law lets you stop paying it can save a household thousands of dollars over the life of a mortgage. The catch is that nobody at the closing table is incentivized to explain the exit.
Who pays PMI, and who it actually protects
The first thing worth getting straight is who PMI protects, because it isn’t you. If you stop paying your mortgage and the lender forecloses, the lender can recover losses up to a point through the policy. You pay the premium; the lender collects the protection. That arrangement exists because a borrower with a small down payment has less of their own money at stake, which lenders treat as higher risk.
Lenders manage that risk by requiring PMI on conventional loans whenever the down payment falls below 20%, or, put another way, whenever the loan-to-value ratio starts above 80%. The flip side is genuinely useful: PMI is the reason a buyer doesn’t have to save a full fifth of a home’s price before owning one. With first-time buyers now making up just 21% of the market, the lowest share since the Realtors’ group began tracking in 1981, the alternative for many would be waiting years longer or not buying at all.
What private mortgage insurance actually costs
The price tag varies more than most people expect, and it tracks closely to your credit. The Urban Institute’s Housing Finance Policy Center, in its 2025 review of mortgage insurance data, puts the annual cost of PMI at roughly 0.46% to 1.5% of the loan amount per year. A borrower with a credit score of 760 or higher might pay near the bottom of that range, while a borrower in the 620-to-639 band can land near the top.
On a $300,000 loan, that spread works out to somewhere between about $115 and $375 a month. The premium is usually folded into your monthly mortgage payment, which is part of why it’s easy to overlook. Two buyers purchasing identical houses on the same street can pay wildly different PMI simply because one spent a year repairing their credit before applying. That alone is an argument for treating your credit score as part of your down payment strategy, not a separate concern.
The federal law that lets you cancel PMI
Here is the part that goes uncollected most often. PMI is not permanent, and a federal law guarantees your right to shed it. The Homeowners Protection Act of 1998, codified at 12 U.S.C. 4901 and following, created two clear exit ramps for most conventional loans.
The first is borrower-requested cancellation. Once your loan balance is scheduled to reach 80% of the home’s original value, you can submit a written request to cancel PMI, provided you have a good payment history and meet the lender’s conditions. You can hit that 80% mark faster by making extra principal payments. The second ramp is automatic, and it requires nothing from you: the law forces lenders to terminate PMI automatically once the balance reaches 78% of the original value, as long as the loan is current. If you’ve fallen behind, the cancellation waits until you catch up.
Knowing how to cancel PMI matters because lenders are not in the habit of volunteering it early. The 80% request is the lever you control, and on a loan paid roughly on schedule it can arrive a year or more before the automatic 78% point. Mark the date you expect to cross 80% on a calendar, and send the request the moment you qualify rather than waiting for the bank to act.
PMI is not the same as an FHA loan’s premium
A common and costly mix-up is treating PMI and the mortgage insurance on an FHA loan as the same thing. They are not, and the difference can follow you for decades. The PMI vs MIP distinction comes down to which loan you took. Conventional loans carry PMI, which you can cancel under the Homeowners Protection Act. FHA loans carry a mortgage insurance premium, or MIP, set by the Department of Housing and Urban Development, and its rules are far less forgiving.
According to HUD, an FHA borrower pays an upfront premium of 1.75% of the loan amount plus an annual premium. The hard part is the cancellation rule: for most FHA loans with a down payment below 10%, that annual premium lasts the entire life of the loan. You can only escape it by refinancing into a conventional mortgage once you have enough equity. So two buyers with thin down payments can end up in very different places, one shedding PMI in a few years and the other paying mortgage insurance for thirty.
So is it always worth avoiding?
It’s tempting to treat PMI as pure waste, but the cleaner way to see it is as the price of buying sooner. If a home costs $300,000 and gaining 20% equity would take you another four years of saving while rents and prices climb, paying a few hundred dollars a month in PMI to buy now and cancel it later can be the rational trade. The mistake isn’t paying PMI; it’s paying it longer than the law requires.
Once you own, the same equity that retires PMI becomes a financial tool in its own right, which is why it’s worth understanding how a HELOC compares to a home equity loan. And if you’re still at the offer stage weighing how to lower your rate, our breakdown of how mortgage points work covers another upfront cost worth modeling against PMI.
Private mortgage insurance is best understood as a toll, not a tax. It buys you the bridge into ownership when you don’t have a 20% down payment, and federal law gives you a guaranteed way off the bridge once you’ve built enough equity. Know your cancellation dates, watch your credit, and you turn a vague monthly charge into something you control.