Private mortgage insurance (PMI) is a type of insurance policy that protects lenders from the risk of default and foreclosure, allowing buyers who are unable to make a significant down payment (or those who choose not to) to obtain mortgage financing at affordable rates. If you purchase a home and put down less than 20%, your lender will minimize its risk by requiring you to buy insurance from a PMI company prior to signing off on the loan. As the borrower, you end up paying the PMI premiums but your lender is the sole beneficiary.

If you have monthly PMI, you continue to make PMI payments every month until your PMI is either terminated (when your loan balance is scheduled to reach 78% of the original value of your home); when it is cancelled at your request because your equity in the home reaches 20% of the purchase price or appraised value (your lender will approve a PMI cancellation only if you have adequate equity and have a good payment history); or when you reach the midpoint of the amortization period (a 30-year loan, for example, would reach the midpoint after 15 years).

If you have a single-premium PMI, your pay the premium upfront in a single lump sum, eliminating the need for a monthly PMI payment. The premium can be paid in full at closing or financed in to the loan. With lender-paid PMI (LPMI), the cost of the PMI is included in the mortgage interest rate for the life of the loan. This can make a lower monthly mortgage payment, but you will end up paying more in interest over the life of the loan. And, unlike monthly PMI, you don't get to cancel or terminate LPMI because it is a permanent part of the loan.

You can avoid paying PMI by making a down payment that is at least 20% of the purchase price of your home. You may also qualify for a piggyback mortgage, in which a second mortgage or home equity loan is taken out along with the first mortgage. In an "80-10-10" piggyback mortgage, for instance, 80% of the purchase price is covered by the first mortgage, 10% is covered by the second loan, and the final 10% is covered by your down payment. This lowers the loan-to-value (LTV) of the first mortgage to under 80%, eliminating the need for PMI.

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