What is PMI?
Private Mortgage Insurance, also referred to as PMI, is a type of mortgage insurance that is commonly required for conventional loan borrowers who finance their home purchase with less than a 20% downpayment.
Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.
What Does PMI Protect?
If you have ever driven a car or rented an apartment, you may be familiar with insurance. While automobile insurance and renter’s insurance are two very different loan products, they both have one one essential component in common; they both protect an asset.
Hopefully you have never encountered a situation where you needed to file a claim and use your insurance to cover a loss. However, one of the most overlooked details about insurance is that it really isn’t about you at all.
Right now, you are probably thinking I’m about to say that it is about the asset – your car, belongings in the apartment, or house.
It’s not.
The reality of the matter is that while insurance can help cover the cost of a loss, insurance is often required to help cover someone else’s loss.
Private mortgage insurance isn’t any different.
So, Who Does PMI Protect?
PMI protects your lender. In the event that you stop making payments on your loan, this insurance protects your lender against losses from default.
Does Everyone Pay PMI?
Lenders usually require PMI with conventional loan products if your downpayment is less than 20%. For example, if you buy a home for $200,000, you’ll likely need a down payment of $40,000 to avoid paying PMI. After you’ve bought the home, you can typically request to stop paying PMI once you’ve acquired 20% equity in your home. PMI is often cancelled automatically once you’ve reached 22% equity.
PMI only applies to conventional loan products. Other types of loans usually include other types of protections. For example, an FHA loan requires a Mortgage Insurance Premium (MIP), which is is structured differently than PMI.