PMI - Private Mortgage Insurance
What is private mortgage insurance?
Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if your down payment is less than 20%. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.
As a general rule, PMI is required anytime a homebuyer either purchases a home with a down payment of less than 20 percent of the purchase price, or refinances the home with a new mortgage that exceeds 80 percent of the property’s appraised value.
In each case, the lender is looking to make sure that the borrower has a personal stake in at least 20 percent of the property.
Let’s say you buy a house and only put five percent down. This means, at the beginning, you only really own five percent of the home. This makes banks nervous. They’ve been studying borrowers’ habits for a long time, and they’ve come to the conclusion that the more of a home the buyer has a stake in, the less likely they are to default.
When a homeowner has already paid for at least 20 percent of property, it is considered unlikely that he or she will walk away from the property and not pay the mortgage — they simply have too much to lose by walking away and not honoring the mortgage.
Making you pay for PMI does not mean the lender has zero risk on a loan. This is because PMI does not insure the entire amount of the mortgage, but only a percentage of it. If you only put down five percent on a property, you may have to pay for PMI that covers 30 percent of the mortgage.