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PMI (Private Mortgage Insurance)
Definition
Private Mortgage Insurance (PMI) is insurance that protects the lender if a borrower defaults, typically required when the down payment is less than 20%.
Explanation
PMI allows homebuyers to purchase with a smaller down payment while protecting the lender. PMI typically costs 0.5-1% of the loan amount annually, added to monthly payments. It can be removed once you reach 20% equity in your home.
PMI is different from homeowners insurance — it protects the lender, not the borrower. On a $300,000 loan, PMI can add $125-$250 per month.
Example
On a $300,000 loan with 10% down, PMI at 0.8% costs $2,400/year or $200/month until the loan-to-value ratio reaches 80%.