History

• In the late 1970s and early 1980s foreclosures in the United States were at the highest rate they had ever been. Banks lost hundreds of thousands of dollars on defaulted loans and implemented a fail-safe: private mortgage insurance.
  
  

Significance

• Private mortgage insurance is a small fee based on the amount of your loan that is paid into your loan each month, which goes directly into an escrow account for the lender, protecting it from loss as a result of default. The PMI percentage is usually a half of a percentage point of your entire loan and is divided up over the loan term.
  
  

Down Payment Requirements

• Without PMI, lenders would have to charge a higher rate of down payment because of the increased risk of losses. This could eliminate the ability for low down payment or no down payment loans altogether.
  
  

Eliminate PMI

• Homebuyers can eliminate the need for PMI altogether by putting at least 20 percent of the purchase price as a down payment. PMI can also be eliminated once a homeowner has paid off 20 percent of the principal balance.
  
  

Considerations

• When applying for a home loan, it is important to be educated about your loan options. Some lenders will offer a loan without private mortgage insurance that comes with a higher rate of interest. Weigh that against a loan with PMI to see if it is a better scenario.
  
  

Misconceptions

• A common misconception is that PMI will have to be part of a homeowner's payment for the duration of the loan. This is not the case. There are several ways to reduce or eliminate PMI over the short term.