Private Mortgage Insurance (PMI) is a type of insurance that plays a key role in many home purchases, especially for those unable to make a large down payment (20% or more). Here’s a comprehensive look at what PMI is, why it exists, how it works, its costs, and ways to manage or eliminate it.
PMI is a supplemental insurance policy required on most conventional loans (those not backed by the government, such as FHA or VA loans) when the borrower makes a down payment of less than 20% of the home’s purchase price or appraised value. It also typically applies during refinancing if home equity is below 20%.
Importantly, PMI protects the lender, not the borrower. If the homeowner defaults on payments and the property goes into foreclosure, PMI reimburses the lender for part of the loss. This reduces the lender’s risk when approving loans with smaller down payments, making homeownership more accessible to more buyers. It does not help the borrower avoid foreclosure or cover missed payments. This requirement stems from federal guidelines and lender policies, often tied to loans backed by entities like Fannie Mae or Freddie Mac.
When Is PMI Required?
Lenders generally mandate PMI for conventional mortgages with:
A down payment under 20%.
Less than 20% equity in a refinance.
In contrast, government-backed loans have different mortgage insurance:
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