PMI is private mortgage insurance: a monthly charge added when you buy a home with less than 20% down. It protects the bank if you stop paying — it does not protect you or your house. Once you own 20% of the home, you can get rid of it.
The name fools everyone. PMI sounds like insurance for you. It is not. PMI insures the lender. If a borrower with a small down payment stops paying, the bank's losses get covered. You pay the bill for the bank's protection — that is the plain truth of it.
Why it exists
Banks see a small down payment as higher risk: you have less of your own money in the home. So when you put down less than 20% on a regular (conventional) loan, the bank requires PMI until your share of ownership grows. It is the toll for getting into a home without saving up a fifth of the price first.
Say you buy a $400,000 home with 10% down — $40,000 — and borrow $360,000. PMI on that loan often runs about $150 to $250 a month, added right on top of your mortgage payment. Over three years, that is real money: roughly $5,400 to $9,000, gone, with nothing to show for it but the loan itself.
How PMI goes away
Every payment chips away at what you owe, and your ownership share grows. Once you owe 80% or less of what the home is worth, you can ask the lender to remove PMI — on a conventional loan, they have to say yes if you are current on payments. Wait longer and it drops off on its own at 78%. A rise in your home's value can get you there faster, though the lender may want a new appraisal to prove it.
One close cousin to know
Government-backed FHA loans charge a similar fee called MIP instead. The annoying difference: on many newer FHA loans, that charge does not fall off at 20% — it can stay for the life of the loan, and the usual way out is refinancing into a conventional loan once you have the equity.