Private Mortgage Insurance (PMI)

Private mortgage insurance, abbreviated PMI, is insurance offered by a private insurance company that protects a lender against loss if a borrower defaults on a conventional mortgage, up to the limit specified in the policy, commonly set around 20 to 25 percent of the loan amount. PMI is typically required on conventional loans where the borrower's down payment is below a certain threshold, most often around 20 percent of the property's purchase price, leaving a relatively high loan-to-value ratio.

Although the policy protects the lender rather than the borrower, the borrower is the one who pays the premium, typically added to the monthly mortgage payment, as the cost of being allowed to buy with a smaller down payment than would otherwise be required.

PMI is the price tag attached to borrowing with a smaller down payment on a conventional loan: the lender is taking on more risk by lending a higher percentage of the home's value, and PMI exists to cover part of that extra risk. The borrower foots the bill, even though the protection is really for the lender's benefit, because without PMI many lenders would simply decline to approve the loan at all with such a small down payment.

Unlike the mortgage insurance premium on some government-backed loans, which can sometimes last for the life of the loan, PMI on a conventional loan is generally cancellable once the borrower builds enough equity.

• Once the loan balance falls to around 80 percent of the home's original value, a borrower can typically request cancellation.
• Many lenders are required to automatically cancel PMI once the balance reaches around 78 percent of the original value, assuming payments are current.
• Rising home values can sometimes accelerate reaching these thresholds, even without extra payments toward principal.

Some lenders offer an alternative where the lender itself pays for mortgage insurance in exchange for a slightly higher interest rate on the loan, rather than charging the borrower a separate PMI premium directly, an arrangement with different trade-offs around cancellation and total long-term cost.

The cost of PMI is not uniform across all borrowers; insurers price it based on factors including the size of the down payment, the borrower's credit score, and the type of loan involved, with riskier combinations of these factors generally resulting in a higher PMI premium. A borrower with a strong credit score and a down payment just under the conventional twenty percent threshold will typically pay noticeably less for PMI than a borrower with a weaker credit profile and a much smaller down payment.

Because PMI pricing varies, some borrowers compare quotes across different PMI providers, where their lender allows a choice, in addition to comparing the overall mortgage offer itself, to minimise the total added cost of this required insurance.

Borrowers who want to remove PMI before naturally reaching the required equity threshold sometimes choose to refinance into a new loan once their home's value has risen enough, through market appreciation or improvements, to bring their loan-to-value ratio below the threshold at which PMI is required. This approach involves the costs of a new loan, including closing costs, so borrowers generally need to weigh the savings from eliminating PMI against the expense of refinancing before deciding whether this route makes financial sense.

An appraisal is typically required to support this kind of refinance, since the lender needs documented evidence of the home's current value to confirm that the loan-to-value ratio genuinely qualifies for PMI removal under the new loan.

Lenders are generally required to provide a borrower with an initial disclosure at closing estimating when PMI is expected to be eligible for cancellation, based on the scheduled amortization of the loan, giving the borrower a reference timeline even before any extra payments or market appreciation are considered.

A second appraisal commissioned specifically to support PMI cancellation is generally paid for by the borrower, and lenders may set minimum standards for which appraisers or valuation methods are acceptable for this purpose.