Private Mortgage Insurance (PMI) is an
insurance policy that protects the lender in the event that the borrower
defaults on the loan. Lenders generally require PMI on loans where the loan to
value ratio exceeds 80%, or, in other words, the buyer's downpayment on the
loan is less that 20%.
In the event of foreclosure, the PMI
company compensates the lender for certain losses incurred. PMI insurance
offers no protection to the buyer. The PMI premium is generally tacked onto the
borrowers monthly mortgage payment.
In obtaining an FHA loan, borrowers pay
for an upfront mortgage insurance premium (MIP) which is itemized on the
settlement statement at closing. Borrowers obtaining VA loans will not pay PMI
or MIP; however, the Department of Veterans Affairs charges a similar VA
Funding Fee which is also itemized on the settlement statement.