Private mortgage insurance

Private mortgage insurance covers the lender's loss if a conventional borrower defaults and the property sells for less than the debt. The borrower pays the premium. The lender receives the benefit.

That asymmetry is not a scandal — it is the stated purpose of the product, which exists so that lenders will accept down payments below twenty percent at all. But it is routinely misunderstood by borrowers who assume it protects them.

What triggers it#

Conventional lending prices risk against the loan-to-value ratio. Below twenty percent down, the lender is exposed to a decline in value large enough to wipe out the borrower's stake, and PMI covers that gap.

Put twenty percent down and it does not apply. Put five percent down and it does, at a premium scaled to the risk.

Getting rid of it#

This is where money is left on the table, routinely.

On a conventional loan secured by a principal residence, the borrower may generally request cancellation once the balance reaches eighty percent of the original property value, provided the loan is current. The servicer may require a current appraisal, particularly where the equity comes from appreciation rather than paydown.

The servicer must terminate it automatically at seventy-eight percent of original value, without a request.

Both figures use the original value, not today's. A property that has appreciated substantially reaches eighty percent of current value long before it reaches eighty percent of original value — and getting credit for that requires asking, with an appraisal.

FHA is a different animal#

FHA loans carry a mortgage insurance premium rather than PMI: an upfront charge and an annual one. For most FHA loans written since 2013, the annual premium runs for the life of the loan regardless of equity.

That single difference is why FHA borrowers who build substantial equity often refinance into a conventional loan even without a rate improvement. The insurance is the reason, not the rate.

The cost of not asking#

PMI on a modest loan commonly runs a few hundred dollars a month. A borrower who crosses the eighty percent threshold and does not request cancellation continues paying it until the automatic termination point arrives, which on a slow-paydown loan can be years later.

Nobody sends a reminder. The threshold is calculable from an amortisation schedule, and the request has to come from the borrower.

Structures other than monthly#

Monthly PMI is the default, not the only option.

Single-premium PMI is paid once at closing, either in cash or financed. It removes the monthly charge entirely, and it is worth calculating against the expected time to reach the cancellation threshold — if that is seven years away, the single premium often wins.

Lender-paid PMI folds the cost into a higher interest rate. The monthly charge disappears from the statement and reappears in the rate. Crucially, it never cancels, because there is no separate insurance to cancel — the higher rate runs for the life of the loan.

That last point is regularly missed. Lender-paid PMI is not free insurance. It is permanent insurance disguised as a rate.