Private Mortgage Insurance - PMI

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS '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. Up-Front Mortgage Insurance - UFMI

    An insurance premium that is collected, typically on Federal ...
  3. HUD-1 Form

    A form used by a settlement or closing agent itemizing all charges ...
  4. 80-10-10 Mortgage

    A mortgage transaction in which a first and second mortgage are ...
  5. Mortgage Broker

    An intermediary who brings mortgage borrowers and mortgage lenders ...
  6. Down Payment

    A type of payment made in cash during the onset of the purchase ...
RELATED FAQS
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, ...

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ... Read Full Answer >>
Related Articles
  1. Insurance

    Insurance Tips For Homeowners

    Use these simple ideas to save money and get better coverage for your house.
  2. Insurance

    15 Insurance Policies You Don't Need

    Learn how to save money by saying "no" to unnecessary coverage.
  3. Personal Finance

    To Rent Or Buy? There's More To It Than Money

    Your lifestyle, level of commitment and the trade-offs need to be carefully weighed.
  4. Home & Auto

    To Rent Or Buy? The Financial Issues

    Thinking of buying a home? We look at the initial and ongoing costs, as well as the so-called benefits.
  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. Home & Auto

    When Owning Your Home Doesn't Pay

    You may think it's better to own than rent, but there are many overlooked costs that could change your mind.
  7. Home & Auto

    6 Reasons To Avoid Private Mortgage Insurance

    This costly coverage protects your mortgage lender - not you.
  8. Home & Auto

    Insuring Federal Housing Authority Mortgages

    This insurance has an edge over private mortgage insurance. Find out why.
  9. Home & Auto

    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?
  10. Home & Auto

    Are You Ready To Buy A House?

    There are a number of factors, aside from cost, that you should think about before buying a new house.

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center