Private mortgage insurance or lenders mortgage insurance is a type of financial product that is designed to protect the lender in case the borrower makes a default or is unable to pay the mortgage payments. Private mortgage insurance ensures that if the mortgagor is unable to pay back the mortgage loan amount even after foreclosure the mortgagee (lender) does not suffer any losses.

• The yearly cost of PMI varies and is expressed in terms of the total loan value in majority of cases. The PMI can vary according to the amount that is involved, the loan term, the type of loan, total value of home that is financed, and the frequency of the premium payments. The PMI may be payable up-front or can be capitalized into the loan itself in cases where the product is single premium in nature.
• Usually the consumer is required to pay the PMI only when the down payment for the mortgage loan is less than 20% of the actual value of the property or assets (or loan-to-value). If the down payment is less than 20% of the value of the home then the PMI will stop after this amount (20%) is paid off. This means that when the borrower owes less than 80% of the total principal the PMI is no longer applicable.
• In many cases the PMI is payable for a fixed period of time (2 or 3 years) even if the owing balance has reached below 80% of the value of the home. In some cases the PMI is payable until the loan has amortized to 78% loan-to-value (LTV) ratio. The request for cancellation of PMI must come from the mortgage servicer to the insurance company and may require another appraisal of the property.
• There are many factors that affect the PMI such as the loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most importantly, credit score. Maintaining a good credit score can help you in getting favorable PMI terms. Although the lender has to pay for such insurance the cost of the same is transferred to the mortgagor (borrower).
• Private mortgage insurance can be avoided in three ways; by opting for a piggyback loan, by choosing a no-PMI, or by choosing the finance single premium option. However all these choices do come with their own drawbacks or “catches”. These options are only advisable for people who have a steady income and expect it to remain the same or increase over the period of the mortgage term.
• A Piggyback loan is where you can take 80% of the purchase price and put it on a conventional mortgage and take the left over 10% and put it on a second mortgage. Even though your second mortgage might have somewhat advanced interest rate you might save in the long term since now every one of your loan will be tax deductible (may change according to law) and if you pay off your second mortgage before time, you will radically lower your monthly expense.
• In a no-PMI loan the mortgage company picks up the expense of the PMI and passes on that expense to the customer in the form of high interest rate. This means that you may need to pay higher amount of interest on a no-PMI loan compared to a traditional one.

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