Private Mortgage Insurance

What Does Private Mortgage Insurance Mean?

Private Mortgage Insurance (PMI) is a policy required by a financial institution for borrowers who make a down payment of less than 20% when purchasing a home and are financing the remainder. PMI is designed to protect the lending institution.

Insuranceopedia Explains Private Mortgage Insurance

When someone borrows money from a lender to purchase a house and makes a down payment of less than 20%, they are required to purchase Private Mortgage Insurance (PMI). The higher the remaining loan balance, the higher the PMI premium. This reduces the financial risk for the lender in case the borrower is unable to repay the loan. Because PMI is added to the monthly mortgage payment along with homeowners insurance and property taxes, it pays to compare quotes from top-rated homeowners insurance companies when buying a home.

PMI payments are billed monthly, but once the borrower has paid 20% of the loan, they can request the lender to cancel the PMI. If the payment exceeds 20%, the lender will automatically cancel the PMI.