What does PMI stand for and when is it required?

Private Mortgage Insurance (PMI) is a type of insurance that protects lenders in case a borrower defaults on their mortgage. This insurance is typically required when the borrower makes a down payment of less than 20% of the home's purchase price. The rationale behind this requirement is that a lower down payment increases the lender's risk since the borrower has less equity in the property. By requiring PMI, lenders mitigate that risk, ensuring they have some protection while also allowing borrowers to purchase homes with smaller initial investments.

In Texas and many other states, PMI is commonly part of the financing arrangement for conventional loans. It can be cancelled once the borrower has built up sufficient equity in the home, often when the loan-to-value ratio falls below 80%. This makes PMI an essential consideration for buyers who cannot afford the typically recommended down payment of 20%.