Private Mortgage Insurance (PMI)
Definition and meaning of Private Mortgage Insurance (PMI) in real estate.
Private Mortgage Insurance (PMI) is a policy that conventional lenders require from buyers who make a down payment of less than 20 percent of the home's purchase price. This insurance protects the lender against financial loss if the borrower defaults on the loan.
In more detail
PMI makes homeownership accessible to buyers who do not have large savings, allowing them to purchase a home with as little as three to five percent down. The cost of PMI is typically added to the borrower's monthly mortgage payment, though it can also be paid as a one-time upfront fee at closing.
The insurance does not protect the buyer, only the lender. Under federal law, borrowers can request to cancel PMI once their principal balance drops to 80 percent of the home's original value.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Required for | Conventional loans with under 20 percent down payment |
| Who pays | The borrower pays the premium, but the lender is protected |
| Cancellation point | Typically when loan-to-value ratio reaches 80 percent |
A buyer purchases a home and makes a down payment of five percent. Because the down payment is under the typical 20 percent threshold, the lender requires them to pay a monthly PMI fee until their equity reaches that 20 percent level.
Frequently asked questions
How can I avoid paying private mortgage insurance?
The easiest way to avoid PMI is to make a down payment of at least 20 percent, or to secure a loan program that does not require it, such as a VA loan.
Does PMI automatically drop off when my home's value goes up?
Not automatically; if home values rise, you must typically request an appraisal to prove your equity has reached 20 percent before the lender will cancel PMI.
Related terms
Sources & references
See our sources and editorial standards.