Private Mortgage Insurance (PMI)

Definition

PMI is required by conventional lenders when the borrower's down payment is less than 20% (i.e., LTV exceeds 80%). It protects the LENDER — not the borrower — against loss in case of default. PMI is typically paid as a monthly premium added to the mortgage payment. Under the Homeowners Protection Act of 1998, lenders must automatically cancel PMI when the loan reaches 78% LTV based on the original amortization schedule, and borrowers can request cancellation at 80% LTV. FHA loans use a similar product called Mortgage Insurance Premium (MIP) with different rules.