PMI, or private mortgage insurance, is a type of insurance that protects the mortgage lender in the event of default or foreclosure and is usually required if you put LESS than 20% down when buying a home. It’s usually a monthly fee tacked on top of your mortgage payment that doesn’t go towards principal or interest, it’s extra money you’re paying the mortgage company because of the low down payment. The annual total you’ll pay in PMI is usually between 0.5% and 2.5% of the total loan amount. So if you buy a $250,000 home and only put down 10% you’d be paying $25,000 up front and borrowing $225,000, and will be paying for PMI.
At 0.5% a year, that means you would be paying an additional $1,125 (or almost $100/month) every year until the PMI is no longer required. PMI is automatically removed when your Loan To Value Ratio (the amount owed on your mortgage divided by the value of the home) reaches 0.78. In our example, the LTV at the start of the loan was $225,000/$250,000 = 0.9, or 90%. When you’ve paid it down to where you only owe $195,000 the PMI should automatically be removed ($195,000/$250,000 = 0.78).