Also written as:
PMI
Insurance you pay monthly on a conventional loan when you put down less than 20%. Protects the LENDER (not you) if you stop paying. Falls off automatically at 20% equity.
PMI — Private Mortgage Insurance — is a monthly insurance premium you pay on a conventional loan when your down payment is less than 20%. It exists to protect the lender, not you, in case you default. Despite that, it's the cost that makes lower-down-payment conventional loans possible.
PMI typically costs 0.3% to 1.5% of the loan amount annually, billed monthly. Your exact rate depends on your credit score (better credit = lower PMI) and your LTV (lower LTV = lower PMI).
Here's the good news: by federal law (the Homeowners Protection Act), PMI must be automatically canceled once your loan-to-value ratio reaches 78%, and you can request cancellation at 80% LTV. So PMI is temporary, not forever. This is one of the biggest advantages of conventional over FHA.
Example
On a $360,000 conventional loan (10% down on a $400K home) with a 720 credit score, PMI is roughly 0.55% annually = $1,980/year, or about $165/month. After you build to 20% equity (through payments + appreciation), it goes away.
Also known as
PMI, conventional mortgage insurance
Source:
CFPB