If you’re buying a house, you may hear the term PMI — but what does it mean? We’ll tell you. Read on to get the scoop on the meaning of PMI.
When you take out a mortgage to purchase a new home, you’ll likely pay for homeowners’ insurance to protect your new property. However, you might also pay for another type of insurance coverage — one that doesn’t necessarily protect you but instead protects the lender.
Private mortgage insurance (PMI) is a common type of insurance that lenders require for mortgages with high loan-to-value (LTV) ratios. Mortgage lenders always accept some kind of risk with mortgages. However, PMI can help lower the risk that some mortgages bring.
Are you interested in learning more about PMI? We can help. Read on to discover our complete guide on private mortgage insurance. Are you ready?
Let’s dive in.
What Is the Definition of PMI?
According to the Collins Dictionary, PMI is an abbreviation that stands for private mortgage insurance. PMI can be defined as an insurance policy protecting the holder against loss resulting from default on a mortgage loan.
In simpler terms, PMI protects the lender — not you — if you stop making payments on your loan.
How Does PMI Work?
More often than not, PMI is required for conventional mortgage loan borrowers.
When you take out a mortgage loan to buy a home and make a down payment of less than 20 percent of the home’s purchase price, PMI may become a part of your mortgage payment. As mentioned above, it protects your lender if you stop making payments on your loan.
Here’s an example:
Let’s say you buy a new home for $200,000 — you’ll likely need a down payment of $40,000 to avoid paying PMI.
Now, after you’ve received the loan (or mortgage) and the home is purchased (in other words, it’s yours), you can typically request to cancel your monthly mortgage insurance premium once you’ve established 20 percent equity in your home.
If you don’t request to stop paying PMI, it’s often canceled automatically once you’ve reached 22 percent equity.
Is Private Mortgage Insurance the Same as Homeowners Insurance?
Many people think PMI and homeowners insurance are interchangeable, but this would be incorrect as they serve different purposes.
Unlike private mortgage insurance, homeowners insurance is completely unrelated to your mortgage, except that lenders require it to protect their interest in the home.
On the flip side, PMI protects the lender, whereas homeowners insurance protects your home and you as the homeowner.
Remember, PMI does not protect you— it protects the lender. Homeowners insurance is different because it protects you if your property gets damaged.
Related Words You Should Know
As you further your knowledge of PMI, you’ll likely encounter new terminology that may cause some confusion if you don’t understand what certain words mean. So to help, we’ve put together a list of related terms and their definitions.
Study the words below, or feel free to come back to this guide for future reference:
- Conventional Loan — Any mortgage loan that isn’t insured or guaranteed by the government, such as under the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Department of Agriculture loan programs. Borrowers making a low down payment may want to consider other types of loans, such as an FHA loan.
- FHA Loan — A type of mortgage insured by the Federal Housing Administration (FHA) and issued by a bank or other approved lender.
- VA Loan — A type of mortgage loan available through the United States Department of Veteran Affairs for service members, veterans, and their surviving spouses.
- Credit Score — A number between 300-850 that depicts a consumer’s creditworthiness.
- Foreclosure — The act of taking possession of a mortgaged property when the mortgagor fails to keep up their mortgage payments.
- Loan Estimate — An important form that you receive after applying for a mortgage that tells you important details about the loan that you’ve requested.
- VA Funding Fee — A one-time payment that the Veteran service member or survivor pays on a VA-backed or VA direct home loan.
- BPMI — Borrower-paid monthly mortgage insurance.
- LPMI — Lender-paid private mortgage insurance.
- Piggyback loan — A home equity loan or home equity line of credit (HELOC) that is made simultaneously as your main mortgage.
- Gross Income — Your gross income is every piece of your income, whereas your net income is what you take home with you.
- Income Ratio — Your debt-to-income (DTI) ratio compares how much you owe each month to how much you earn.
Does PMI Stand for Anything Else?
PMI is most commonly used when referring to private mortgage insurance. However, the abbreviation may also stand for:
- Purchasing Managers Index
- Private Medical Insurance
- Project Management Institute
- Program Management Information
- Positive Material Identification
- Philip Morris International
- Performance Measurement and Improvement
- Pima Medical Institute
- Power Management Interface
- PM (evening) Inspection (U.S. Military Academy)
- Prior Mutual Information
- Proof of Mathematical Investigator
- Pure Metal Insert
- Physical Model Interface
PMI stands for private mortgage insurance and refers to a type of insurance that your lender may require if your down payment is less than 20 percent of the home’s purchase price.
In short, you pay a monthly premium to the insurer, and the coverage will pay a portion of the balance due to the mortgage lender if you default on the home loan.
Unlike homeowners insurance that protects you and your property, PMI protects the lender against losses in the event homebuyers who get a conventional loan default on their mortgage.
Whether you’re a new buyer that just started to search through inventory, are on the hunt for a lower rate, or simply holding off until next July when you might be able to afford a larger monthly payment, we hope this guide has provided you with all of the information you need to understand PMI.
To learn about more interesting words, feel free to explore our website, where you’ll discover new terminology, grammar tips, useful tools, and more.