A policy provided by private mortgage insurers to protect lenders against loss if a borrower defaults. Most lenders require PMI for loans with loan-to-value (LTV) percentages in excess of 80%. This allows the borrower to make a smaller down payment of as low as 3%, instead of about 20%, and usually requires an initial premium payment and possibly an additional monthly fee depending on the loan's structure.
Keep track of your payments on the principal of the mortgage. When you reach 80% equity, notify the lender that it is time to discontinue the PMI premiums. To make it easier, lenders are now required to tell the buyer at closing how many years and months it will take for them to pay 20% of the principal to cancel PMI. However, U.S. law does allow lenders to continue requiring PMI all the way down to 50% equity for so-called high-risk borrowers.
Traditionally, loans considered high risk include reduced documentation loans, in which customers provide less proof of income and other information during the approval process. Loans for people with poor credit histories and higher debt-to-income ratios also fall into this category.
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