PMI (Private Mortgage Insurance)
Private Mortgage Insurance (PMI) is an insurance policy required by lenders on conventional mortgage loans when the borrower's down payment is less than 20% of the home's purchase price, protecting the lender — not the borrower — against financial loss in the event the borrower defaults on the loan. PMI enables borrowers to obtain mortgage financing with a smaller down payment while compensating the lender for the elevated risk.
PMI exists because mortgage lenders face statistically higher default rates on loans with high loan-to-value (LTV) ratios. When a borrower puts down less than 20%, the lender has less collateral cushion against a decline in home values, and the borrower has less personal equity at stake — both factors associated with elevated default risk. PMI transfers a portion of this risk to a private insurance company, allowing the lender to extend credit on more favorable terms than would otherwise be available to the borrower.
In the United States, PMI is provided by private mortgage insurance companies such as MGIC, Radian, Essent, Enact, and National MI — not by the federal government. (Government-backed loans such as FHA loans carry mortgage insurance premiums, or MIP, which functions similarly to PMI but is provided by the Federal Housing Administration under different rules and pricing structures.) PMI premiums vary based on the borrower's credit score, the LTV ratio, the loan term, and whether the premium is paid monthly, upfront, or through a lender-paid structure. A typical PMI premium for a borrower with good credit and an LTV between 85% and 90% might range from 0.5% to 1.0% of the original loan amount per year, paid as a monthly addition to the mortgage payment.
The Homeowners Protection Act of 1998 (HPA) provides federal consumer protections regarding PMI cancellation on residential mortgages. Under the HPA, borrowers have the right to request cancellation of PMI once the loan balance reaches 80% of the original purchase price or appraised value (whichever is lower), as long as the borrower has a good payment history and the lender does not have evidence that the property has declined in value or that other higher-risk conditions exist. Lenders are required by the HPA to automatically terminate PMI when the loan-to-value ratio reaches 78% of the original property value based on the scheduled amortization — even without a borrower request. These protections apply to loans originated after July 29, 1999 and secured by a single-family primary or secondary residence.
PMI should not be confused with the homeowners insurance (also known as hazard insurance) that mortgage lenders require all borrowers to maintain. Homeowners insurance protects against physical damage to the property from covered perils such as fire, wind, and theft. PMI, by contrast, is purely a credit risk instrument that protects the lender and provides no benefit to the homeowner in the event of a loss. Despite this, PMI enables many homebuyers to enter the market years earlier than if they were required to save a full 20% down payment — a meaningful benefit in a housing market characterized by rising prices.
Federal tax law previously allowed taxpayers to deduct PMI premiums as a form of qualified mortgage insurance premiums. This deduction has expired and been reinstated several times over the years and has generally been available only to taxpayers with adjusted gross incomes below specified thresholds. Prospective buyers should consult current IRS guidance to determine whether the PMI deduction is available in the tax year they are purchasing.