Private Mortgage Insurance (PMI) is a type of insurance that a borrower might be required to buy as a condition of a conventional mortgage loan. It is arranged by the lender and provided by private insurance companies. PMI protects the lender if the borrower fails to make loan payments. It is usually required if the down payment is 20% or less of the sales price or appraised value, which means that the loan-to-value ratio (LTV) is 80% or more. Once the principal is reduced to 80% of value, the PMI is often no longer required on conventional loans. PMI can be paid for in two ways: a monthly premium or a one-time up-front premium paid at closing. The cost of PMI can vary, but it typically costs between 0.2% and 2% of the loan amount per year.

It is important to note that PMI only protects the lender, not the borrower. If the borrower falls behind on mortgage payments, PMI does not protect them, and they can still lose their home through foreclosure. PMI can help borrowers qualify for a loan that they might not otherwise be able to get, but it can increase the cost of the loan.

It is possible to avoid PMI by making a down payment of 20% or more on a home purchase. Some lenders offer conventional loans with smaller down payments that do not require PMI, but these loans may come with higher interest rates.

Once the borrower has built equity of 20% in their home, they can cancel their PMI and remove that expense from their monthly payment. If the borrower is current on their mortgage payments, PMI will automatically terminate on the date when their principal balance is scheduled to reach 78% of the original appraised value of their home.