Private Mortgage Insurance
Private Mortgage Insurance (PMI) is insurance that protects lenders if borrowers default on their mortgage payments. It's typically required when homebuyers make a down payment of less than 20% of the home's purchase price.
Example
“Since Sarah only had enough for a 10% down payment on her $300,000 home, her lender required her to purchase private mortgage insurance at $150 per month.”
Memory Tip
Think 'PMI = Protecting My Investment' - it protects the lender's investment when you can't put 20% down.
Why It Matters
PMI can add $100-300+ to your monthly mortgage payment, significantly impacting affordability. Understanding when PMI can be removed (typically at 20% equity) can save homeowners thousands of dollars over the life of their loan.
Common Misconception
Many people think PMI protects the homeowner if they can't make payments, but it actually protects the lender. PMI doesn't help homeowners avoid foreclosure or provide any direct financial benefit to the borrower - it's purely for the lender's protection.
In Practice
On a $400,000 home with a 10% down payment ($40,000), the loan amount is $360,000. With a 90% loan-to-value ratio, PMI might cost 0.5% annually, or $1,800 per year ($150 monthly). Once the homeowner pays down the loan to $320,000 (80% of original home value) or the home appreciates enough to create 20% equity, they can request PMI removal, saving $1,800 annually.
Etymology
The term emerged in the 1950s when private companies began offering mortgage insurance to compete with government programs, combining 'private' (non-government) with 'mortgage' from Old French 'mort gaige' meaning 'dead pledge.'
Common Misspellings
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