Private Mortgage Insurance (PMI)
PMI is insurance that protects the lender, not you, when your down payment on a conventional loan is under 20 percent. It is added to your monthly payment and can usually be cancelled once you have built enough equity in the home.
When you put down less than 20 percent on a conventional mortgage, the lender faces more risk, so it requires private mortgage insurance to cover potential losses if you default. PMI is a real cost to you, often a few hundred dollars a month, but it buys the lender protection, not you.
The upside is that PMI is not permanent. As you pay down the balance and the home builds equity, your loan-to-value ratio falls. You can generally request PMI cancellation at 80 percent LTV, and under federal rules lenders must automatically end it at 78 percent of the original value, provided you are current on payments. Government-backed loans such as FHA use a different mortgage insurance structure with its own rules.
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Related terms: Loan-to-Value (LTV) , PITI , Upfront Mortgage Insurance Premium (UFMIP)
Source: Consumer Financial Protection Bureau, Owning a home
Last updated . Part of the FinExplained finance glossary .