Private Mortgage Insurance (PMI) is a type of insurance that protects lenders against the risk of default on a mortgage loan. It is typically required by lenders when a borrower makes a down payment of less than 20% of the home's purchase price.
The purpose of PMI is to provide the lender with additional financial protection in case the borrower fails to make their mortgage payments and goes into foreclosure. If the borrower defaults on the loan, the PMI coverage reimburses the lender for a portion of the outstanding balance.
PMI is an added expense for the borrower and is usually paid as a monthly premium that is included in the mortgage payment. The cost of PMI can vary depending on factors such as the loan amount, loan-to-value ratio, and the borrower's credit score. Typically, the lower the down payment and the higher the loan-to-value ratio, the higher the PMI premiums.
It's important to note that PMI is different from homeowner's insurance, which protects the homeowner against damage to the property. PMI specifically protects the lender and does not provide any direct benefit to the borrower.
Once the borrower has built up enough equity in the home (usually when the loan-to-value ratio reaches 80%), they may be able to cancel the PMI. This can be done through a process called PMI removal, either by requesting it from the lender or automatically when the loan-to-value ratio reaches a certain threshold. The specific requirements for PMI removal vary depending on the loan agreement and the lender's policies.
It's always advisable for borrowers to carefully review the terms and conditions of their mortgage agreement, including the details of the PMI, to understand how it will impact their monthly payments and overall cost of homeownership.