Private Mortgage Insurance, Conceptually

Private mortgage insurance, usually shortened to PMI, is insurance that protects the lender — not you — against the risk of the loan defaulting. It typically gets added to the monthly payment when the down payment falls below a certain threshold, commonly cited around 20% of the purchase price, though the exact rules vary by lender and loan type.

PMI exists because a smaller down payment means the lender is financing a larger share of the home's value, which raises the lender's risk if the borrower stops paying and the home has to be sold. PMI doesn't cancel that risk for the borrower — it simply compensates the lender for taking it on, at the borrower's expense.

PMI is usually priced as a percentage of the loan amount per year, and it gets folded into the monthly payment. Here's a simplified illustration of what that can add.

Loan amount: $250,000
Illustrative PMI rate: 0.75% per year

Annual PMI cost: $250,000 × 0.75% = $1,875/year
Added to the monthly payment: ≈ $156.25/month

This is on top of the loan's regular principal and interest.

PMI is insurance that primarily protects the ____ against the risk of the loan defaulting, not the borrower.

PMI usually isn't permanent. Once enough equity has built up in the home — through paying down the loan, the home appreciating in value, or both — many lenders allow it to be removed, though the specific process and threshold vary by lender and loan type. It's worth understanding as an added cost tied to the size of the down payment, not a fixed feature of every mortgage.

Who does PMI primarily protect?

PMI is typically a permanent cost that stays on a mortgage payment for the entire life of the loan, no matter what.