Private Mortgage Insurance (PMI)

Definition - What does Private Mortgage Insurance (PMI) mean?

Private mortgage insurance is insurance protection that hedges lenders against mortgage defaults by their borrowers. Lenders typically make sure that this type of insurance is purchased if their borrower puts less than a 20% down payment on the house. This is because these situations represent a higher risk for the lender.

In the context of the law, lenders can still foreclose upon borrowers if they default. However, private mortgage insurance can significantly decrease any potential losses in such a default.

Justipedia explains Private Mortgage Insurance (PMI)

Private mortgage insurance is valuable to both the lender and the borrower. The reason is because it allows the lender to be able to lend greater amounts of money without losing confidence, and it allows the borrower to buy a home with a smaller down payment of his or her own money.

The downside for borrowers is that it means they have to borrower more money overall if they make a smaller down payment. However, many borrowers still view these situations as favorable.

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