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Private Mortgage Insurance (PMI)
Insurance that protects lenders in case of mortgage default—typically required if the down payment is less than 20% of the home's purchase price.
More Details
Private Mortgage Insurance (PMI) is insurance coverage that lenders typically require borrowers to pay for if they have a conventional loan and make a down payment of less than 20% of the home's purchase price. PMI protects the lender—not the borrower—in the event of loan payment defaults. It is arranged by the lender and provided by private insurance companies.
Example
Imagine you are purchasing a home for $300,000 and are making a down payment of $30,000, which is 10% of the purchase price. Since your down payment is less than 20%, your lender will likely require you to pay for PMI. The PMI premium will be added to your monthly mortgage payment (you may also have the option to pay upfront) until the equity in your home reaches 20% or more. This ensures that the lender’s investment is protected in case you are unable to make your mortgage payments.
Related Terms
ACH
Acronym for Automated Clearing House, a U.S. financial network used for electronic payments and money transfers.
Deferment Period
A specified time during which loan payments are temporarily suspended or reduced.
Loan Contract
A legally binding agreement between a lender and a borrower outlining the terms of a loan.