Definition
Private Mortgage Insurance (PMI) is insurance that protects the lender if you default on your conventional mortgage loan. It's typically required when your down payment is less than 20% of the home's purchase price. Unlike most insurance, PMI doesn't protect you—it protects the lender, but you pay the premium.
Formula
PMI rates typically range from 0.5% to 1.5% of the original loan amount annually, divided into monthly payments. For example, a $300,000 loan with a 1% PMI rate costs $250 per month.
Example
PMI Cost Example
For a $400,000 home with a 10% down payment ($40,000), your loan amount is $360,000. With a PMI rate of 0.8%, your annual PMI cost is $2,880, or $240 per month. Once your equity reaches 20% through payments or appreciation, you can request PMI cancellation. It automatically terminates at 22% equity.