PMI (Private Mortgage Insurance)

Private Mortgage Insurance is a type of insurance that protects the mortgage lender if the borrower stops making payments. It is typically required when the down payment is less than 20% of the home's purchase price, resulting in a loan-to-value ratio above 80%.

PMI costs generally range from 0.3% to 1.5% of the original loan amount per year, depending on the borrower's credit score and LTV ratio. On a $400,000 loan, this translates to $100 to $500 per month. PMI is usually included in the monthly mortgage payment.

The good news is that PMI is not permanent. Under the Homeowners Protection Act, lenders must automatically cancel PMI when the LTV reaches 78% through scheduled payments, and borrowers can request cancellation at 80% LTV. Strategies to avoid or minimize PMI include making a 20% down payment, using a piggyback loan, or choosing a lender-paid PMI option.