What is PMI?

Private Mortgage Insurance (PMI) is a commercial insurance policy required by conventional mortgage lenders when a homebuyer makes a down payment of less than 20% of the property's purchase price, resulting in a Loan-to-Value (LTV) ratio exceeding 80%. Paid for by the borrower but protecting the lender, PMI offsets the lender's financial risk of default by covering a portion of the unpaid balance if the borrower ceases payments and the home goes to foreclosure. PMI is distinct from Mortgage Insurance Premiums (MIP) used on government-backed FHA loans, which typically carry different payment structures and termination rules.

PMI is structured in several formats, most commonly Borrower-Paid Mortgage Insurance (BPMI), where a premium is added directly to the borrower's monthly PITI payment. Other options include Single-Premium PMI (paid as a lump sum at closing or financed into the loan balance), Lender-Paid PMI (LPMI, where the lender covers the premium in exchange for a permanently higher interest rate), and Split-Premium PMI. Under the federal Homeowners Protection Act of 1998 (HPA), conventional borrowers with BPMI have the right to request PMI cancellation in writing once the principal loan balance reaches 80% of the home's original purchase price or appraised value, provided they have a good payment history and no secondary liens. Lenders are legally mandated to automatically terminate BPMI once the balance is scheduled to reach 78% LTV, or when the loan reaches the midpoint of its amortization schedule, provided payments are current.