PMI (Private Mortgage Insurance)
Private Mortgage Insurance (PMI) is insurance required on conventional loans when the down payment is less than 20%, protecting the LENDER (not the borrower) against default. PMI can be canceled once the borrower reaches 20% equity, unlike FHA mortgage insurance.
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Exam Tip
PMI protects the LENDER, not borrower. Required when down payment < 20% on conventional loans. Can be canceled at 20% equity. FHA uses MIP, not PMI.
What is PMI (Private Mortgage Insurance)?
Private Mortgage Insurance (PMI) protects the lender if a borrower defaults on a conventional mortgage. It's required when the down payment is less than 20% of the purchase price, reducing the lender's risk on higher loan-to-value (LTV) loans.
Key PMI Facts
| Feature | Details |
|---|---|
| Required When | Down payment < 20% on conventional loans |
| Protects | The LENDER, not the borrower |
| Cost | 0.5% - 1.5% of loan amount annually |
| Cancellation | Can be removed at 20% equity |
| Automatic Removal | Required at 22% equity (78% LTV) |
When PMI is Required
| Down Payment | PMI Required? | LTV Ratio |
|---|---|---|
| Less than 20% | Yes | Over 80% |
| 20% or more | No | 80% or less |
PMI Cost Factors
| Factor | Impact on Cost |
|---|---|
| Credit Score | Higher score = lower PMI rate |
| Down Payment | Larger down = lower PMI |
| Loan Type | Fixed vs. ARM affects pricing |
| LTV Ratio | Higher LTV = higher PMI |
Credit score ranges and approximate PMI rates:
- 760+ credit score: ~0.5% annually
- 620-639 credit score: ~1.5% annually
PMI Payment Options
| Option | Description |
|---|---|
| Monthly Premium | Added to mortgage payment |
| Upfront Premium | Paid at closing |
| Split Premium | Part upfront, part monthly |
| Lender-Paid (LPMI) | Lender pays; higher interest rate |
How to Remove PMI
| Method | Requirements |
|---|---|
| Borrower Request | Reach 20% equity, request in writing |
| Automatic Cancellation | At 22% equity (lender required) |
| Midpoint Termination | At loan midpoint, regardless of equity |
| Refinance | New loan with 20%+ equity |
| Home Appreciation | New appraisal showing 20% equity |
PMI vs. MIP (FHA Mortgage Insurance) Comparison
| Feature | PMI (Conventional) | MIP (FHA) |
|---|---|---|
| Loan Type | Conventional loans | FHA loans |
| Upfront Premium | None required | 1.75% of loan amount |
| Annual Premium | 0.5% - 1.5% | 0.15% - 0.75% |
| Cancellation | At 20% equity | 11 years minimum (or life of loan if <10% down) |
| Credit Score Impact | Affects rate significantly | Same rate for all borrowers |
| Down Payment to Avoid | 20% | Cannot avoid MIP |
PMI Calculation Example
| Loan Details | Amount |
|---|---|
| Home Price | $300,000 |
| Down Payment (10%) | $30,000 |
| Loan Amount | $270,000 |
| PMI Rate | 0.75% annually |
| Annual PMI Cost | $2,025 |
| Monthly PMI | $168.75 |
Advantages of PMI
| Advantage | Benefit |
|---|---|
| Lower Down Payment | Buy home sooner with less cash |
| Removable | Cancel once at 20% equity |
| Tax Deductible | May be deductible (check current tax law) |
| Build Equity Faster | Start building equity sooner |
Exam Alert
Key exam points for PMI:
- Protects the LENDER, not the borrower
- Required when down payment is less than 20% on conventional loans
- Cancellable at 20% equity (borrower request) or automatic at 22% equity
- PMI is for conventional loans; FHA loans use MIP (Mortgage Insurance Premium)
- Unlike MIP, PMI has no upfront premium requirement
- Higher credit scores result in lower PMI rates
Study This Term In
Related Terms
Conventional Loan
A conventional loan is a mortgage not insured or guaranteed by a government agency (unlike FHA, VA, or USDA loans), typically requiring a 20% down payment to avoid private mortgage insurance (PMI).
FHA Loan
An FHA loan is a mortgage insured by the Federal Housing Administration, designed for first-time and lower-income homebuyers with lower down payment requirements (3.5%) and more flexible credit standards, requiring mortgage insurance premium (MIP).
Mortgage
A mortgage is a loan used to purchase real estate, where the property serves as collateral, typically repaid over 15-30 years with interest.
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