Private Mortgage Insurance (PMI)
Insurance that protects the lender when a borrower makes a down payment of less than 20% on a conventional mortgage.
What is PMI?
Private mortgage insurance (PMI) is a type of insurance that conventional mortgage lenders require when borrowers make a down payment of less than 20% of the home's purchase price. PMI protects the lender — not the borrower — against loss if the borrower defaults on the loan. The cost typically ranges from 0.5% to 1.5% of the loan amount annually, added to monthly mortgage payments. Borrowers can request PMI cancellation once they reach 20% equity in the home based on the original purchase price, and lenders must automatically cancel it at 22% equity under the Homeowners Protection Act of 1998.
Example
A buyer purchases a $400,000 home with a 10% down payment ($40,000), borrowing $360,000. The lender charges 0.8% PMI annually ($2,880/year or $240/month). Once the loan balance falls to $320,000 (20% equity at original value), the borrower can request PMI cancellation — saving $240/month.