Private mortgage insurance

What It Means

Private mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more insurance (PMI) is a policy a lender may require on a conventional home loan when the down paymentDown paymentThe share of a home's price you pay upfront in cash when you buy it; the mortgage covers the rest. See more is less than 20% of the purchase price. You pay for it, usually as part of the monthly payment, and it pays the lender if you stop making payments. The Consumer Financial Protection Bureau (CFPB) is clear that PMI doesn't protect you: fall behind and you can still lose the home to foreclosure. A federal law, the Homeowners Protection Act of 1998, sets when PMI can be canceled and when it has to end.

How People Say It

• "We're paying PMI until we hit twenty percent equity."
• "Call the servicer and ask them to drop the PMI."
• "Is that PMI or the FHA insurance?"

The Breakdown

Worked example. A $400,000 home bought with 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more% down, so a $360,000 loan over 30 years at an example fixed rateFixed interest rateAn interest rate that's set when you borrow and stays the same for the life of the loan, so the monthly payment doesn't change. See more of 6.5%. The principal and interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more payment is $2,275.44. Here's where the Homeowners Protection Act lines fall on the original payment schedule:

What the result means. The law measures against the home's original value, which the CFPB defines as the lower of the sales price and the appraised value when you bought. You can also reach the 80% line early by paying extra principal and then ask, the CFPB confirms. The tool shows the scheduled dates, and any extra principal you pay moves the 80% date earlier.

Good to Know

To cancel at 80%, the CFPB says your servicer can ask for evidence, such as an appraisal, that the home's value hasn't fallen below its original value, and you need to be current on payments. The automatic end at 78% happens on the scheduled date even if you never ask. FHA loans carry a different insurance, the mortgage insurance premiumInsurance premiumThe amount you pay to keep an insurance plan, such as health insurance, in force, usually monthly, quarterly or yearly, whether or not you use any care. See more (MIP), set by the Department of Housing and Urban Development (HUD) rather than governed by these PMI rules. HUD's Mortgagee Letter 2023-05 cut the annual MIP for most FHA borrowers from 0.85% to 0.55% in February 2023, and HUD's mortgage insurance premiums page lists the current rates.

Related Terms and Categories

• Mortgage

  A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.

• Down payment

  The share of a home's price you pay upfront in cash when you buy it; the mortgage covers the rest.

• Amortization

  Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.

• Extra payment

  Money paid toward a loan on top of the required payment, usually to lower the principal sooner, which cuts the interest and can shorten the loan.

• Home equity

  The part of your home you own outright: its current value minus everything you still owe on loans secured by it.

• Closing costs

  The fees and upfront charges you pay to finalize a mortgage, apart from the down payment, itemized on your Loan Estimate and Closing Disclosure.

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