Private Mortgage Insurance

Private Mortgage Insurance

Private mortgage insurance (PMI) is extra insurance a lender may require you to buy if you're forking over less than 20% of a property's value as a down payment, because people who put down small amounts are more likely to default on a loan. If you opt for mortgage insurance, once you've got 20% equity in your home, you should be able to cancel the insurance. (Though an appraisal may be required beforehand.)

An important thing to understand about PMI is that the 20% equity threshold relates to your home's value, not necessarily 20% of the mortgage amount. If you get a great deal and buy your home below market value, buy a fixer-upper and fix it up to increase its value, or pick a locale that suddenly becomes popular and rapidly appreciates in value, your mortgage amount might be very different from the value of your house. If you are required to pay for PMI, keep tabs on the changing value of your home.

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