Private Mortgage Insurance (PMI)

Published: | Updated: December 20, 2017

Definition - What does Private Mortgage Insurance (PMI) mean?

Private Mortgage Insurance (PMI) is a policy that a financial institution requires of a borrower who has paid lower than 20% for the purchase of a home and is borrowing money to pay the home in full. This is meant to protect the lending financial institution.

Insuranceopedia explains Private Mortgage Insurance (PMI)

When someone borrows money from a lender to make a full payment for a house of which they have paid less than 20% as down payment, they are required to purchase Private Mortgage Insurance. The higher the balance for the house, the higher the PMI premium. This is a way of reducing the financial risk for the lender in case the borrower is no longer able to pay for the loan.

Payment for this insurance is billed every month. However, when the borrower has paid 20% of the loan, they can ask the lender to cancel the PMI. When payment exceeds 20%, it is cancelled automatically by the lender.

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