Private Mortgage Insurance (PMI) is a special type of insurance policy, provided by private insurers, to protect a lender against loss if a borrower defaults. Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home's purchase price – or, in mortgage-speak, the mortgage's loan to value (LTV) ratio is in excess of 80% (the higher the LTV ratio, the higher the risk profile of the mortgage). PMI allows borrowers to obtain financing if they can only afford (or prefer) to put down only 5% to 19.99% of the residence's cost, but it comes with additional monthly costs. Borrowers pay their PMI monthly until they have accumulated enough equity in the home that the lender no longer considers them high-risk.
PMI costs can range 0.25% to 2% (but typically run about 0.5 to 1%) of your loan balance per year, depending on the size of the down payment and mortgage, the loan term and your credit score. The greater your risk factors, the higher the rate you pay. Also, because PMI is a percentage of the loan amount, the more you borrow, the more PMI you’ll pay. There are six major PMI companies in the United States. They charge similar rates, which are adjusted annually.