A:

Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary mortgage and no longer make payments and the home ends up going into foreclosure. When applying for a home loan, lenders typically require that a borrower provides a 20% down payment on the home. If the borrower is unable to put down 20% or more, or does not have the required funds to do so, then lenders will typically look at the loan as a riskier investment for their balance sheet and will require a PMI payment from the borrower.

The PMI payment is usually paid monthly as part of the overall mortgage payment to the lender. Over several years of paying on the loan and once the borrower has paid enough towards the principal amount of the loan (to cover the 20%), they can contact their lender and ask that the PMI payment be removed. Many borrowers either forget or do not know that PMI can be removed once the accepted level is achieved.

Another way to avoid the PMI payment is by taking out a smaller loan (typically at a higher interest rate) to cover the amount of the 20% down, this is commonly known as "Piggybacking". Now the borrower is committed on two loans, but since the funds from the second loan are used to pay the 20% deposit, the borrower can avoid the PMI payment. The borrower can typically deduct the interest on both loans on their federal tax return if they are itemizing deductions, which most homeowners do anyways. (For related reading, take a look at Outsmart Private Mortgage Insurance.)

This question was answered by Steven Merkel.

RELATED FAQS
  1. When Is Mortgage Insurance Typically Required?

    Learn about the situations in which borrowers may be required to buy private mortgage insurance, and discover who this insurance ... Read Answer >>
  2. On average, what can I expect my private mortgage insurance (PMI) rate to be?

    Learn the several factors that come into play when insurance companies determine the private mortgage insurance rate for ... Read Answer >>
  3. What’s the Difference Between a Mortgage Lender and a Mortgage Servicer?

    Buying a home is an exciting and confusing process. Once the loan is secured, it's important to know who gets the payment: ... Read Answer >>
Related Articles
  1. Investing

    Understanding Private Mortgage Insurance

    Private mortgage insurance, or PMI, protects lenders against loss if a borrower defaults.
  2. Investing

    Private Mortgage Insurance - PMI

    A policy required by lenders for borrowers who are putting down less than 20% for a home mortgage. PMI usually requires an initial premium payment and possibly an additional monthly fee depending ...
  3. Insurance

    6 Reasons to Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  4. Personal Finance

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  5. Personal Finance

    Best 3 Mortgage Calculator Websites with PMI

    Learn more about all of the factors behind PMI, and discover the three best websites that provide a mortgage calculator that includes PMI.
  6. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  7. Insurance

    How to Get Rid of Private Mortgage Insurance

    Private mortgage insurance benefits the lender (the sole beneficiary of PMI), but it can add a sizable chunk to your monthly house payment.
  8. Insurance

    Are Low-Down-Payment Mortgages Better than Paying PMI?

    When you can’t put down at least 20% on a mortgage, you usually have to have private mortgage insurance (PMI). But what about low-down-payment mortgages?
  9. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  10. Personal Finance

    How to Get a No Down Payment Mortgage

    There are only a few ways to get out of making a down payment, but the requirements are strict.
RELATED TERMS
  1. Down Payment

    A type of payment made in cash during the onset of the purchase ...
  2. Delinquent Mortgage

    A mortgage for which the borrower has failed to make payments ...
  3. Short Refinance

    The refinancing of a mortgage by a lender for a borrower currently ...
  4. Lender

    Someone who makes funds available to another with the expectation ...
  5. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  6. Wraparound Mortgage

    A type of loan that enables a borrower who is paying off an existing ...
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center