Loading the player...

What is a 'Private Mortgage Insurance - PMI'

A risk-management product that protects lenders against loss if a borrower defaults. Most lenders require private mortgage insurance (PMI) for loans with loan-to-value (LTV) percentages in excess of 80% (the buyer put down less than 20% of the home's value upon purchase). This allows borrowers to make a smaller down payment of 3% to 19.99%, instead of 20%, allowing them to obtain a mortgage sooner since they don’t have to save up as much money. Borrowers pay their PMI monthly until they have accumulated enough equity in the home that the lender no longer considers them high risk.

BREAKING DOWN 'Private Mortgage Insurance - PMI'

PMI only applies to conventional loans. Federal Housing Administration loans have their own mortgage insurance with different requirements, while Veterans Administration loans don’t require any mortgage insurance despite allowing 0% down payments.

PMI costs about 0.25% to 2% of your loan balance per year, depending on your down payment, loan term and credit score. The greater your risk factors, the higher the rate you pay. Also, because PMI is a percentage of the loan amount, the more you borrow, the more PMI you’ll pay. There are six major PMI companies in the United States. They charge similar rates, which are adjusted annually.

Keep track of your payments on the mortgage’s principal. When you reach 20% equity, you can notify the lender in writing that it is time to discontinue the PMI premiums. Lenders are required give the buyer a written statement at closing notifying them how many years and months it will take for them to pay 20% of the principal. You can also request PMI cancelation if your equity grows to 20% due to home-price appreciation or because you’ve made additional principal payments. The lender should comply as long as your home’s value hasn’t dropped, you have a history of on-time payments and you don’t have a second mortgage.

Once your down payment, plus the principal you’ve paid off, equals 22% of the home’s purchase price, the lender must automatically cancel PMI as required by the federal Homeowners Protection Act, even if your home’s market value has gone down (as long as you’re current on your mortgage).

RELATED TERMS
  1. Mortgage Insurance

    An insurance policy that protects a mortgage lender or title ...
  2. Lender-Paid Private Mortgage Insurance

    Private mortgage insurance that a mortgage lender pays on behalf ...
  3. Down Payment

    A type of payment made in cash during the onset of the purchase ...
  4. Home-Equity Loan

    A consumer loan secured by a second mortgage, allowing home owners ...
  5. Homeowners Protection Act

    A law designed to reduce the unnecessary payment of private mortgage ...
  6. Home Mortgage

    A loan given by a bank, mortgage company or other financial institution ...
Related Articles
  1. Investing

    Understanding Private Mortgage Insurance

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

    6 Reasons to Avoid Private Mortgage Insurance

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

    Understanding Your Mortgage

    We walk through the steps needed to secure the best loan to finance the purchase of your home.
  6. Investing

    Financing Basics For First-Time Homebuyers

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

    Insuring Federal Housing Authority Mortgages

    This insurance has an edge over private mortgage insurance. Find out why.
  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. 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.
  10. Insurance

    How to Outsmart Private Mortgage Insurance

    It's possible to use a second mortgage to avoid this fee, but is it in your best interest?
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
  5. 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 >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center