Private Mortgage Insurance (PMI)
Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Full Definition
Private mortgage insurance (PMI) is required by lenders on conventional mortgage loans where the borrower's down payment (or equity) is less than 20% of the property's value — meaning the LTV exceeds 80%. PMI protects the lender, not the borrower, against losses if the borrower defaults. The cost is typically 0.5%–2% of the loan amount annually, added to monthly payments. Under the Homeowners Protection Act, borrowers have the right to request PMI cancellation once their equity reaches 20%, and lenders must automatically cancel it at 22% equity based on the original amortization schedule. FHA loans have their own mortgage insurance premiums (MIP) that behave differently.
Real-World Example
A buyer puts 10% down on a $400,000 home (LTV = 90%). The lender requires PMI at 0.8% annually, adding $267/month to the payment until equity reaches 20%.
How Private Mortgage Insurance (PMI) Appears on the Real Estate Exam
Common question types, tested concepts, and what to watch out for
PMI protects the LENDER, not the borrower. It is required when LTV exceeds 80% on conventional loans. Know that FHA uses MIP (mortgage insurance premium) — different rules apply. PMI cancellation at 80% LTV is the borrower's right.
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