Private mortgage insurance (PMI) protects the lender if you stop making payments on your loan. If your down payment on a home is less than 20 percent of the appraised value or sale price, your lender will require you to get mortgage insurance. A mortgage insurance policy protects your lender in case you default on the payments.
If the mortgage holder stops paying the loan, the PMI policy protects the lender by paying the costs of foreclosing on a house. PMI premiums are added to your monthly mortgage payment. You may be able to cancel private mortgage insurance after a few years based on certain criteria, such as paying down your loan balance to a certain amount.
If you are making a down payment of less than 20 percent, be sure you know if PMI is required and how much the PMI will add to your monthly payments. Not making on-time payments may delay when you can cancel your PMI. Before you commit to paying for mortgage insurance, find out the specific requirements for cancellation.
Don’t confuse PMI with mortgage life insurance, which is designed to pay off a mortgage in the event of a borrower’s death or disability.