Private mortgage insurance (PMI)
Insurance that protects the lender, not the borrower, typically required on conventional loans with less than 20% down.
What it means
PMI covers the lender’s loss if a borrower with a small down payment defaults. The borrower pays for it, usually as a monthly charge added to the mortgage payment, though some loans use a one-time upfront premium or a slightly higher rate instead. Cost depends on credit score, down payment and loan details.
Unlike FHA mortgage insurance, PMI on a conventional loan is temporary. Under federal law, borrowers can ask to cancel it once the balance reaches 80% of the home’s original value, and it ends automatically at 78% if payments are current. Some lenders allow removal sooner based on a new appraisal showing higher value.
Example
Suppose a buyer borrows $360,000 on a $400,000 home, a 90% loan-to-value ratio, and PMI costs $150 a month. Once the balance is paid down to $320,000, 80% of the original value, the borrower can request cancellation.
How it’s used
- Buying with less than 20% down on a conventional loan
- Comparing conventional and FHA loan costs
- Deciding when to make extra principal payments
Good to know
- Track the balance and request cancellation in writing at 80%, rather than waiting for automatic removal.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.