Private Mortgage Insurance (PMI) is extra insurance that lenders may require from homebuyers who obtain a loan that is more than 80 percent of the home’s value. Put another way, it may be required if you are buying a home and have a down payment of less than 20 percent.
PMI enables borrowers with less cash to have greater access to homeownership and it protects the lender against loss if the borrower defaults on the loan. Once the loan balance is paid down to 80 percent of the property value, and assuming the borrower has a good payment history, lenders will often drop the PMI coverage requirement. However, the responsibility for keeping track of the loan balance falls to the borrower. If you fail to request that the lender drop the coverage, you may find yourself paying unnecessary premiums—which can range from $250 to $1,200 per year.