Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a monthly premium a conventional lender charges when your down payment is under 20 percent, and it protects the lender, not you, if the loan defaults. It buys you into a property with less cash up front, then falls away once you have built enough ownership in the home for the lender to feel covered.

PMI shows up on conventional loans, the ones backed by Fannie Mae and Freddie Mac. Government loans have their own version with different rules, so the cancellation math below is for conventional financing.

In practice

Say you buy a single-family rental for $300,000 and put down 10 percent, or $30,000. Your loan is $270,000, which is a 90 percent loan-to-value ratio. PMI on that loan might run about 0.6 percent of the balance per year, so $270,000 × 0.006 = $1,620 a year, or $135 a month folded into your payment. That premium is pure cost. It does nothing for your equity and nothing for your tenant.

The premium ends when your loan-to-value drops to 78 percent of the original value, which on a $300,000 purchase means a $234,000 balance. Under the federal Homeowners Protection Act, the lender must drop PMI automatically at 78 percent, and you can request cancellation at 80 percent. Reaching 78 percent through scheduled payments alone takes years, so many owners refinance or pay down the balance to get there faster. If you put 20 percent down at the start, you skip PMI entirely.

Why it matters to a small landlord

PMI is a recurring expense that quietly drags on cash flow, and it is easy to forget once it is bundled into a single monthly payment. On the rental above, $135 a month is $1,620 a year that comes straight off your net, so it belongs in any honest deal analysis before you buy. Run it through your numbers the same way you would taxes and insurance, ideally in a cash-on-cash calculator so you see the real return on the cash you actually put in. It also changes how a low-down-payment purchase compares to a larger down payment, which is worth modeling when you decide how much to put down.

The other half is watching for the cutoff. Once your balance crosses 80 percent of the original value, you can ask the lender to drop the premium, but they will not always volunteer early, so the date is yours to track. That tracking pairs with the broader job of tracking mortgage interest, principal, and escrow correctly across the year.

PMI lives inside your monthly housing cost alongside principal, interest, taxes, and insurance, the four parts of PITI. Whether you carry it depends on your loan-to-value ratio at closing, and shedding it is one of the first wins as your equity grows. Know the threshold, mark the date, and stop paying for it the month you are allowed to.