Real Estate
What is PMI (Private Mortgage Insurance)?
Definition
PMI is insurance the borrower pays to protect the lender when the down payment is less than 20% on a conventional mortgage. PMI usually costs 0.3% to 1.5% of the loan amount per year and must be canceled once the loan balance reaches 78% of the original value.
Real-World Example
A buyer puts 10% down on a $350,000 home. PMI adds $175 to the monthly payment. Once the balance drops to $273,000 through amortization or appreciation, PMI cancels automatically under the Homeowners Protection Act.
Why It Matters
PMI is a bank protection the borrower pays for. Refinancing or requesting cancellation at the 80% LTV threshold can save $2,000+ per year.
Frequently Asked Questions
Is PMI the same as FHA MIP?
No. FHA mortgage insurance premiums have different rules and typically cannot be canceled without refinancing.