Private Mortgage Insurance (PMI) is a type of insurance that borrowers are usually required to buy if they take out a conventional mortgage loan with a down payment of less than 20% of the home's purchase price. PMI protects the lender, not the borrower, by insuring the lender against losses if the borrower fails to make mortgage payments and defaults on the loan
. PMI allows borrowers to qualify for a mortgage with a lower down payment, but it increases the overall cost of the loan. The cost of PMI is typically paid as a monthly premium added to the mortgage payment, though sometimes it can be paid as a one-time upfront premium or a combination of both
. PMI is required only on conventional loans with less than 20% down payment and is different from mortgage insurance premiums (MIP) associated with FHA loans. PMI can be canceled once the borrower has built up 20% equity in the home, either by paying down the loan balance or through home appreciation. Lenders are required to cancel PMI automatically when the mortgage balance reaches 78% of the home's original value or halfway through the loan term, whichever comes first
. In summary:
- PMI protects the lender, not the borrower.
- It is required for conventional loans with less than 20% down payment.
- It increases monthly mortgage costs.
- It can be canceled once sufficient equity is reached (usually 20%).
- PMI is different from other types of mortgage insurance like FHA's MIP
This insurance helps lenders manage the risk of loans with high loan-to-value ratios and enables more borrowers to purchase homes with smaller down payments.
