Definition
Private mortgage insurance (PMI) is a protective policy that reimburses a lender from losses due to foreclosure.
Analysis
PMI is commonly required for mortgage loans that exceed an 80% loan-to-value ratio. Conventional mortgages do not require coverage through PMI.
Premiums for PMI can add a substantial cost onto a monthly mortgage payment. This can add up to thousands of dollars in extra fees paid by a homeowner.
PMI is generally required anytime the primary mortgage loan is above 80% of the appraised value of the property. A homeowner paying PMI may get their property appraised if they feel that the value has appreciated enough to where they have at least 20% equity in the property.
A prospective homebuyer may avoid PMI if they are able to pay at least 20% down payment at closing. Additionally, a combination of cash down payment and a second mortgage could be used to avoid having to pay for PMI.
PMI is sometimes mistakenly referred to as primary mortgage insurance.
