What does PMI stand for in the context of mortgage lending?

In the context of mortgage lending, PMI stands for Private Mortgage Insurance. This type of insurance is typically required by lenders when a borrower is unable to make a substantial down payment, commonly less than 20% of the home's purchase price. The primary purpose of PMI is to protect the lender in case the borrower defaults on the loan.

Private Mortgage Insurance alleviates some of the risks associated with lending by providing a safety net for the lender. Borrowers who have to pay PMI can either pay it as a monthly premium added to their mortgage payment or as a one-time upfront premium at closing. Once the borrower builds enough equity in the home, typically when their equity reaches 20%, they may be able to cancel the PMI, providing a financial relief.

Understanding the role and function of PMI is crucial for buyers, especially first-time homebuyers, as it affects monthly payments and overall affordability in the home buying process.