What type of mortgage typically requires PMI?

Private Mortgage Insurance (PMI) is typically required for conventional loans when the borrower makes a down payment of less than 20%. This requirement is implemented to protect the lender from the increased risk of default that can occur when a borrower has a lower equity stake in the property. Since a down payment of less than 20% indicates that the borrower has less investment in the home, PMI acts as a safeguard for the lender.

In contrast, a fixed-rate mortgage with a 20% down payment does not necessitate PMI because the borrower is demonstrating sufficient equity in the home from the outset. Interest-only mortgages and FHA loans have different risk profiles and insurance requirements; FHA loans, for example, require mortgage insurance premiums (MIP) regardless of the down payment amount, while the type of mortgage that typically necessitates PMI is specifically tied to conventional loans with smaller down payments.