What is PMI?

PMI stands for private mortgage insurance. It's an insurance policy that protects the lender, not the borrower, in case the borrower defaults on their mortgage loan.

Here's how it works:

When you take out a conventional mortgage with a down payment of less than 20% of the purchase price, your lender typically requires you to pay PMI, depending on your loan type.

The PMI premium is added to your monthly mortgage payment and typically ranges from 0.5% to 1.0% of the loan amount annually, this can vary depending on your situation.

So, for example, if you have a $200,000 loan and you're required to pay PMI at a rate of 0.75%, your monthly PMI payment would be $125.

PMI does not protect you, the borrower, in any way. If you default on your loan, you can still lose your home to foreclosure, even if you've been faithfully paying your PMI premiums.

There are a few ways to avoid paying PMI:

• Make a down payment of at least      20% of the purchase price. This will bring your loan-to-value ratio (LTV)      down to 80% or below, the threshold at which most lenders require PMI.

• Consider government-backed loans. FHA loans and VA loans do not require PMI regardless of the down payment amount. However, there are eligibility requirements for these types of loans.

Here are some additional factors to consider:

Cost of PMI:

 PMI premiums can vary depending on your loan amount, credit score, and loan-to-value ratio. However, they typically range from 0.5% to 1.0% of the loan amount annually.

Financial situation:

 Weigh the cost of PMI against the amount you can save by making a larger down payment or using another strategy.

Long-term plans: 

If you plan to own your home for a long time, it may be worthwhile to make a larger down payment to avoid PMI altogether. However, if you plan to sell your home within a few years, PMI may be a more affordable option.