Private Mortgage Insurance (PMI) is a mandatory requirement imposed by mortgage lenders when a homebuyer makes a downpayment of 20% or less on a conventional loan. This insurance serves as protection for the lender in case the borrower defaults on the loan. It’s important to note that PMI can be eliminated after a certain period when the borrower’s equity surpasses 75% of the home’s current appraised value.
In contrast, Federal Housing Administration (FHA) loans require a Mortgage Insurance Premium (MIP). Unlike PMI, MIP on FHA loans remains in effect for the entire duration of the loan. This insurance premium provides similar protection to the lender in the event of a borrower default, allowing FHA to continue facilitating affordable homeownership for a broader range of individuals.