Private Mortgage Insurance (PMI) is an insurance policy that protects a mortgage lender against financial loss if a borrower defaults on a conventional mortgage. Typically required when a borrower’s down payment is less than 20% of the home’s purchase price, PMI reduces the lender’s risk on loans with high Loan-to-Value Ratio (LTV) by shifting potential losses to the insurer. Unlike homeowners insurance, which safeguards the homeowner’s property, PMI exclusively protects the lender.
Lenders prefer buyers to start with at least 20% equity to minimize default risk. When buyers cannot meet this threshold, PMI enables them to purchase a home with smaller down payments. Key points:
Under the Homeowners Protection Act, PMI must be canceled automatically when a borrower reaches 22% equity. Borrowers may request cancellation once 20% equity is achieved, documented via appraisal or an amortization schedule.
Borrowers can remove PMI by refinancing into a new loan when home value or principal payments push equity above 20%, though closing costs apply. To avoid PMI altogether, buyers may:
A first-time buyer purchases a $300,000 home with a $15,000 (5%) down payment. The lender requires PMI. The borrower pays an extra monthly premium until equity reaches 20%, via principal reduction or home value growth. Once 20% equity is verified, they can request PMI cancellation.
Since its inception in 1957, PMI has expanded homeownership access by lowering upfront cost barriers. It competes with government mortgage insurance programs, serving borrowers who prefer conventional loans with smaller down payments.
Private Mortgage Insurance is a crucial tool in real estate financing. By protecting lenders against default risk, PMI allows buyers to purchase homes with down payments under 20%. Although it increases monthly mortgage costs, PMI can be canceled or eliminated through equity growth or refinancing, making homeownership more attainable for many.
