Private Mortgage Insurance (PMI) is a type of insurance that protects lenders against the risk of default by borrowers who put down less than 20% of the purchase price as a down payment on their mortgage. If a borrower defaults on their loan, the lender can use the PMI policy to recover a portion of their losses.
PMI is typically required by lenders when a borrower has less than 20% equity in the home. It is usually added to the borrower’s monthly mortgage payment and the cost can vary depending on the size of the down payment, credit score, and loan-to-value (LTV) ratio. Once the borrower reaches a certain level of equity in the property, usually around 20-22%, the PMI can be removed from the loan.
Borrowers with PMI payments may be able to cancel it when the loan-to-value (LTV) reaches 78% or 80% of the home’s value. The lender must automatically cancel PMI when the LTV reaches 78%, regardless of the borrower’s request.