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. Why would a homebuyer need to take out PMI (private mortgage insurance)?

    Learn why some home buyers are required to take out private mortgage insurance (PMI), and how it affects the total monthly ... Read Answer >>
  3. Why do I need to pay private mortgage insurance (PMI)?

    The extra interest payments caused by private mortgage insurance may seem excessive, but there's a good reason lenders need ... Read Answer >>
Related Articles
  1. Investing

    Understanding Private Mortgage Insurance

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

    6 Reasons to Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  3. 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.
  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. Investing

    Financing Basics For First-Time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  6. 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.
  7. 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?
  8. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  9. Insurance

    6 Reasons To Avoid Private Mortgage Insurance

    Homebuyers who put less than 20% down will likely be forced to secure private mortgage insurance. Here are six reasons to avoid it.
RELATED TERMS
  1. Private Mortgage Insurance - PMI

    A policy provided by private mortgage insurers to protect lenders ...
  2. Delinquent Mortgage

    A mortgage for which the borrower has failed to make payments ...
  3. Down Payment

    A type of payment made in cash during the onset of the purchase ...
  4. Short Refinance

    The refinancing of a mortgage by a lender for a borrower currently ...
  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. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  2. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  3. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the ...
  6. Border Adjustment Tax

    A tax levied on goods based on where they are sold – exported goods are exempt from tax; those imported and sold in the ...
Trading Center