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Private Mortgage Insurance Exposed: The PMI Cheat Sheet 

 March 30, 2024

By  Lora Keller

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Almost everyone wants to be a homeowner. As children, we all imagine what our lives will be like when we grow older and where we will end up. Homeownership isn’t just a dream, it’s something you’ve fantasized about your entire life. 

Don’t let something intimidating like a down payment crush your hopes of home ownership. Many Americans struggle to save up enough money for a downpayment on a property. That is why PMI (Private Mortgage Insurance) exists. Not everyone can realistically afford to pay a large down payment on a property. 

What is Private Mortgage Insurance?

Private mortgage insurance is actually not for you. It’s for your bank lender. Confusing, I know.

The way that PMI works: 

Whenever anyone wants a mortgage loan from the bank but cannot pay the full down payment amount, the bank will require you to get private mortgage insurance. You will pay monthly towards your private mortgage insurance and in return the insurance agency protects your mortgage lender.

Why does your mortgage lender require you to get private mortgage insurance? 

What does PMI do for the lender?

What Does Private Mortgage Insurance Do?

Private mortgage insurance shows your lender a few different things about you as a borrower. 

  1. Reducing Risky Business

Example: 

You are let go from your current job and are looking for a new one. The bills start to pile up and you make a few late payments on your mortgage loan. The private mortgage insurance will reimburse your lender, helping to minimize any loss on your lender’s end. 

It is simple when you think about it this way: 

It is insurance you pay on your mortgage. If you don’t pay your mortgage, the private mortgage insurance company covers paying your lender, ensuring that your lender doesn’t lose money. 

Just like with any insurance. It is there to make sure you have a safety net when things aren’t going according to plan.

In short, the lender will see your loan as less of a risk with private mortgage insurance and will be more likely to agree to the loan, which is exactly what you want. 

However, this does NOT mean you are protected from losing your home. PMI is not meant to protect you from losing your home. It is there to protect your lender from losing money if you can’t make a payment or if you default on your loan. 

Couple Looking Over PMI Policy
  1. Reducing Possible Loss:

When someone defaults on a mortgage loan, it is a huge loss for the bank. They are losing money they invested in the property, legal fees, and other expenses. 

But there are also major losses your lender deals with when you pay your mortgage late or go several months making no payments. PMI helps to cover some of those expenses to help reduce the financial loss on your lender’s side. 

  1. Encourages Borrowing Responsibly: 

The biggest disadvantage of Private Mortgage Insurance is paying for it.

Yup, as the borrower, you are responsible for picking up the bill. 

Just like everything in life, if you’re willing to pay more upfront you get a better deal. PMI unfortunately will increase what you are paying for your home monthly. This helps to increase the borrower’s likelihood of not missing payments and borrowing more responsibly. 

This is another reason for the bank to trust you more as a borrower.

When Can You Ditch Private Mortgage Insurance?

Yes, private mortgage insurance costs more initially, however, it’s not forever. For most homeowners, you can get rid of PMI once you’ve reached 20% equity. 

But what exactly does that mean?

So when you borrow money from the bank to buy a home, the bank owns the property. If they are who technically paid for it, it makes sense. When you make a downpayment on your home, you are paying towards owning that home. This ownership is called equity. 

Example:

If you made a 20% downpayment on your home and your lender gave you a loan for the other 80%, then you own 20% of the home and the bank owns 80%. In other words, you would have 20% equity in the home and the bank would have 80% equity. 

A homeowner having equity in the home is important for most lenders because it incentivizes homeowners to continue making payments and to take care of the property.

Even for the banks, agreeing to a loan in which the bank pays 100% of the amount isn’t smart business. You would start to see all different types of economic issues, especially if people just stopped making payments on their mortgage loans. And with little to none of their own money invested in the home, what incentive would homeowners have to stay and pay their mortgages?

It’s the same principle that you see with most children. When they are given a new pair of shoes or a new tablet, eventually, they don’t care about them anymore and treat them poorly. But the very first time they buy their own pair of shoes or their own tablet, they make sure to keep them in pristine condition. 

How Americans Afford Homeownership

Unfortunately, many Americans don’t have the financial resources to save up money for a downpayment. This is why private mortgage insurance is such a reasonable solution for some Americans. 

For people who are unable to make a downpayment that size, homeownership used to seem like a fantasy. 

Now, mortgage lenders won’t overlook someone just because of their downpayment amount. Private mortgage insurance makes it so that everyone has a better chance of owning their own home. 


Once you have reached 20% equity of your home, most mortgage lenders will allow you to drop private mortgage insurance which will reduce your monthly mortgage payment. Some lenders will even allow you to cancel your private mortgage insurance before you reach 20% equity, so don’t forget to contact them every so often and ask about your PMI.

Lora Keller

CertResRD3931


Lora Keller 

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