What Is PMI and How Do I Get Rid of It?

If you are buying a home in Indianapolis with less than 20% down, you will almost certainly pay private mortgage insurance. Most first-time buyers encounter PMI for the first time on their Loan Estimate and do not fully understand what it is, why they are paying it, or how to eventually stop paying it. This article covers all three.

What PMI Is and Why It Exists

Private mortgage insurance is a policy that protects your lender, not you, if you default on your loan. When a buyer puts less than 20% down, the lender takes on more risk because there is less equity cushion between the loan balance and the home's value. PMI compensates the lender for that additional risk by paying out a portion of the loan balance in the event of default.

PMI does not benefit the borrower directly. It is a cost you pay to give the lender confidence to approve a lower down payment loan. The practical effect is that PMI makes homeownership accessible to buyers who cannot yet save a full 20% down payment, which for a $240,000 home in Indianapolis would be $48,000. If you are still working toward your down payment, our walkthrough of how to save for a down payment in Indianapolis covers what most buyers actually need and where the help is.

How Much PMI Costs

PMI is calculated as an annual percentage of your loan balance and collected monthly. According to the Urban Institute's Housing Finance Policy Center, conventional PMI rates typically range from 0.46% to 1.50% of the original loan amount per year, with rates varying based on your credit score, loan-to-value ratio, and the insurer.

Credit score has a significant impact. According to MGIC rate data, a borrower with a 760 credit score putting 3% down pays roughly 0.58% annually. A borrower with a 619 score at the same down payment pays roughly 1.86% annually, more than three times as much for the same coverage. A higher credit score before applying meaningfully reduces your PMI cost.

How PMI Is Collected

Most borrowers pay PMI as a monthly addition to their mortgage payment. It appears as a separate line item on your mortgage statement. Some lenders offer single-premium PMI, where you pay the entire cost upfront at closing, or lender-paid PMI, where the lender covers the PMI premium in exchange for a slightly higher interest rate. Monthly PMI is generally the most common and transparent option for first-time buyers because it has a clear removal path.

When and How PMI Is Removed

This is where many buyers lose money by not acting. The Homeowners Protection Act of 1998 governs PMI cancellation on conventional loans and establishes two removal thresholds.

You can request removal at 80% of original purchase price

Once your loan balance drops to 80% of the original purchase price, you have the right to request PMI cancellation in writing. Your lender cannot require you to wait longer if you have a good payment history and can demonstrate that the home's value has not declined. On a $240,000 home, 80% of the original purchase price is $192,000, meaning you need to pay the loan down to $192,000.

This threshold is based on the original purchase price, not the current appraised value, unless you request removal based on appreciation (covered below). Keep track of your loan balance and request removal in writing as soon as you hit this threshold.

Automatic termination happens at 78% of original purchase price

If you do not request cancellation at 80%, the Homeowners Protection Act requires your lender to automatically terminate PMI when your loan balance reaches 78% of the original purchase price, provided your payments are current. On the $240,000 example, that is a balance of $182,400. You do not need to do anything for automatic termination, but waiting for it rather than requesting cancellation at 80% costs you extra months of PMI payments.

Using appreciation to remove PMI early

If your home has increased in value since purchase, you may be able to remove PMI early based on 20% equity in the current appraised value rather than the original purchase price. The rules vary by lender, but the Homeowners Protection Act allows this with conditions: you must have held the loan for at least two years and have 25% equity based on a new appraisal, or at least five years with 20% equity. An appraisal will cost several hundred dollars. Whether it makes financial sense depends on how much PMI you would save versus the appraisal cost.

PMI vs FHA Mortgage Insurance Premium

FHA loans require mortgage insurance premium (MIP), which is structured differently from conventional PMI and is harder to remove. Understanding the difference matters when deciding which loan type to use.

FHA MIP has two components. The upfront MIP is 1.75% of the loan amount, paid at closing or financed into the loan. For a $228,000 loan, that is $3,990 upfront. The annual MIP is 0.55% of the loan balance per year, collected monthly, per current HUD guidelines effective March 2023. For a $228,000 loan, that is approximately $104 per month.

The critical difference from conventional PMI is that FHA MIP generally cannot be removed if you put less than 10% down. If your down payment is less than 10%, MIP stays for the life of the loan. The only way to eliminate it is to refinance into a conventional loan once you have reached 20% equity. If your down payment is 10% or more, MIP ends after 11 years.

For buyers with good credit (above 700), conventional PMI is often the less expensive long-term option because it can be removed. For buyers with lower credit scores where conventional PMI rates are high, FHA MIP at 0.55% may cost less per month even though it cannot be removed as easily. Run the numbers for your specific credit profile with your lender before deciding.

Ways to Avoid PMI Entirely

A few options exist for buyers who want to avoid PMI from the start, though each involves tradeoffs.

The most straightforward is a 20% down payment. On a $240,000 Indianapolis home that is $48,000, which is out of reach for many first-time buyers. IHCDA programs can help reduce upfront costs but do not eliminate PMI if total equity stays below 20%.

Lender-paid PMI (LPMI) has the lender cover the PMI premium in exchange for a higher interest rate. There is no monthly PMI line item, but you pay for it through a higher rate for the life of the loan. Unlike monthly PMI, LPMI cannot be cancelled when you reach 20% equity. For buyers planning to stay long-term, this often costs more over time.

A piggyback loan finances part of the down payment through a second mortgage to bring the first mortgage to 80% LTV, eliminating PMI. These are less common than before 2008 and the second mortgage typically carries a higher interest rate, which can offset the PMI savings. Discuss with your lender whether this makes sense for your situation.

PMI in the Context of Your Full Monthly Payment

PMI is one of the line items in your total monthly housing cost alongside principal, interest, property taxes, and home insurance. On a $240,000 Indianapolis home with 5% down, PMI adds roughly $133 per month. When you request cancellation at the 80% threshold, that $133 disappears from your payment permanently. That is roughly $1,600 per year returned to your budget for the remaining life of the loan.

Use the Indianapolis Mortgage Calculator to see the full monthly payment breakdown including PMI and the specific month it removes based on your loan inputs.