Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is a type of guarantee insurance offered by a private insurance company to protect the holder of a mortgage from a loss. Private mortgage insurance is typically used protect the lender if a borrower does not have the full 20 percent needed to pay the down payment on a home loan. A borrower who has less than 20 percent of a down payment agrees to obtain PMI with the lender. This allows the borrower to obtain a mortgage with a smaller down payment because the lender is protected against defaults on the loan. A borrower who needs PMI is generally charged one-half of one percent of the loan, with the PMI premiums not being tax deductible. After an agreed amount of the principle is paid, the borrower may be able to discontinue PMI. This usually only happens after 20 percent of the principle has been paid.