loans

private mortgage insurance

Insurance required by lenders when a homebuyer makes a down payment of less than 20%, protecting the lender in case of default.

Example

“With only 10% down, she was required to pay PMI of $150/month until her equity reached 20%.”

Memory Tip

PMI = Private Mortgage Insurance. Less than 20% down? You pay for the lender's protection.

Why It Matters

Private mortgage insurance directly affects your monthly mortgage payment and total borrowing costs. Understanding PMI helps you make informed decisions about down payment size and can save you thousands of dollars over the life of your loan by planning to reach that 20 percent threshold.

Common Misconception

Many people believe that PMI protects them as the homebuyer, but it actually protects the lender from losses if you default. Once you build enough equity in your home, you can request to have PMI removed, which many homebuyers do not realize or pursue.

In Practice

If you purchase a home for 300,000 dollars with a 10 percent down payment of 30,000 dollars, you would need to borrow 270,000 dollars and pay PMI on top of your regular mortgage payment. This PMI might cost 150 to 250 dollars per month until you reach 20 percent equity in the home, which could take five to ten years depending on your payments and home appreciation.

Etymology

PRIVATE (not government) MORTGAGE INSURANCE protecting lenders on high-LTV loans.

Common Misspellings

private mortgege insuranceprivate mortgague insurance

Related Terms

down payment LTV mortgage equity

More in loans

Other loans terms you should know

amortizationThe process of spreading out a loan into a series of fixed p…amortizeTo gradually pay off a debt through regular payments that co…collateralAn asset pledged as security for a loan, which the lender ca…loanA sum of money borrowed that is expected to be paid back wit…principalThe original sum of money borrowed in a loan, or the amount …refinancingThe process of replacing an existing loan with a new one, us…