What PMI is — and what it isn't
Private mortgage insurance protects the lender against loss if a low-down-payment loan defaults; the borrower pays the premium and receives nothing but loan approval. That approval has value — PMI is the price of buying now instead of after years of saving toward 20% (a timeline the down payment calculator makes concrete). The premium runs 0.3% to 1.5% of the loan per year depending mostly on credit score and LTV: a 760-score borrower putting 10% down might pay 0.3-0.5%; a 650 score with 5% down can pay triple that. On a $380,000 loan at 0.6%, that's $190 a month — real money, but not the villain it's often made out to be.
The three ways PMI ends
- Borrower-requested cancellation at 80% LTV (original value). Under the federal Homeowners Protection Act, when your balance amortizes to 80% of the original purchase price (or appraised value at closing, if lower), you can request cancellation in writing — good payment history required, and the request is yours to make, not the servicer's to volunteer.
- Automatic termination at 78% LTV. If you never ask, the servicer must drop PMI when the balance hits 78% of original value on the amortization schedule (and the loan is current). With 10% down at today's rates, that's typically year 5-7; with 3-5% down, year 8-11.
- The appreciation shortcut. Most servicers will also cancel based on current value with a new appraisal: commonly 75% LTV if the loan is 2-5 years old, 80% after 5 years (exactly the thresholds this calculator applies). In a market rising 4-5% a year, a 10%-down buyer can hit 75% of current value by year 2-3 — years ahead of the schedule, for the cost of a $400-600 appraisal.
Reframing the cost: PMI as a loan rate on the gap
Here's the calculation that changes minds. PMI isn't really a fee on your whole mortgage — it's the cost of borrowing the down payment you don't have. Put 5% down instead of 20% and the "missing" 15% ($60,000 on a $400,000 house) costs you, say, $190 × 12 = $2,280 a year: an effective 3.8% interest rate on that gap — often cheaper than the years of rent paid while saving it, and far cheaper than most people assume. The calculator's last row prices your own gap. The corollary: draining the emergency fund to dodge PMI is usually the worse trade — check what cushion you need first with the emergency fund calculator.
Ways to skip or shed PMI
- Lender-paid PMI (LPMI): the lender "waives" PMI for a ~0.25-0.5 point higher rate — permanent, baked into the rate for the life of the loan. Usually loses to borrower-paid PMI that cancels in year 4-7, unless you'll sell quickly.
- Piggyback 80/10/10: a second loan (often a HELOC) covers part of the down payment, keeping the first mortgage at 80%. Works when the second loan's rate is modest; compare total monthly cost, not just the PMI line.
- Prepay principal early. Every extra dollar shortens the runway to 80%. Small consistent prepayments in the first years often pull cancellation forward by 12-24 months.
- Watch the market. If nearby comps are up 10%+ since purchase, call the servicer and ask their current-value cancellation rules before spending on the appraisal — requirements vary by servicer and by how long you've had the loan.
- FHA is a different animal: FHA mortgage insurance (MIP) can't be cancelled at 80% — with under 10% down it lasts the life of the loan, and the standard exit is refinancing into a conventional loan once equity reaches 20%.
The calendar-reminder move
Servicers profit from inertia: automatic termination at 78% is the law's backstop, but the 80% request date arrives 1-2 years earlier and requires you to act. When you close on a low-down-payment loan, set two reminders — one at the projected 80% date from this calculator, one annually to sanity-check local prices against the appreciation shortcut. Ten minutes of paperwork routinely saves $2,000-5,000 of premiums; fold the freed-up cash into the payment itself and the amortization schedule compresses further.