What is private mortgage insurance (PMI)?

Private Mortgage Insurance (PMI) is a type of insurance policy that lenders often require borrowers to purchase when they have a down payment of less than 20% on a home. PMI protects the lender in case the borrower defaults on the mortgage, and it allows borrowers with smaller down payments to qualify for home loans. Here's how PMI works:

1. Down Payment Requirement: When you buy a home, a down payment is typically required. A conventional mortgage loan usually requires a down payment of at least 20% of the home's purchase price to avoid PMI. If you can't afford a 20% down payment, your lender may require you to get PMI.

2. PMI Premium: If you have less than a 20% down payment, you'll be required to pay a monthly premium for PMI. The cost of PMI can vary depending on factors like the loan amount, your credit score, and the loantovalue (LTV) ratio. PMI premiums can add to your monthly mortgage payments.

3. Lender Protection: PMI primarily benefits the lender, not the borrower. It's designed to protect the lender's financial interests in case the borrower defaults on the loan. If you stop making mortgage payments and the lender forecloses on your home, PMI helps cover the lender's losses.

4. Automatic Termination: Federal law mandates that lenders automatically terminate PMI when the borrower's loan balance reaches 78% of the home's original purchase price, provided the borrower is current on payments. At this point, you can request the removal of PMI.

5. BorrowerRequested Cancellation: You can request the removal of PMI once your loan balance reaches 80% of the home's original value. This involves contacting your lender and following their specific requirements for cancellation.

6. Final Termination: PMI must be terminated once the loan balance reaches 78% of the home's original value, even if you haven't requested its removal.

It's important to note that PMI does not protect the borrower; it protects the lender. Borrowers pay the premiums, but the insurance coverage benefits the lender in case of default. If you're required to get PMI, it's essential to understand the cost and how to potentially remove it when you reach the necessary loantovalue ratio.