Private Mortgage Insurance (PMI) is a type of insurance that a homebuyer may be required to purchase when taking out a conventional mortgage loan with a down payment of less than 20% of the home's purchase price. PMI protects the lender-not the borrower-by compensating the lender if the borrower stops making mortgage payments and defaults on the loan

Key points about PMI when buying a house:

• Purpose: PMI protects the lender against the higher risk of lending when the borrower has less than 20% equity in the home.
• Cost: PMI typically adds an extra monthly premium to your mortgage payment, though sometimes it can be paid as a one-time upfront premium or a combination of both

• Cost factors: The cost depends on the loan amount, down payment size, credit score, and mortgage type. For example, PMI can range from $30 to $70 per $100,000 borrowed annually

• Duration: PMI is not permanent. You can request cancellation once your loan balance falls to 80% of the home's original value, and lenders must cancel PMI automatically when the balance reaches 78% or at the midpoint of the loan term

• Requirement: PMI is generally required only for conventional loans with down payments under 20%. Other loan types, like FHA loans, have different mortgage insurance structures

Summary

PMI enables buyers to purchase a home with a smaller down payment but increases the overall loan cost. It protects the lender from default risk, not the borrower, and can be removed once sufficient equity is built in the home