Private Mortgage Insurance (PMI) is an insurance policy that comes into play when a borrower takes out a conventional mortgage and makes a down payment of less than 20% of the home's purchase price. This insurance is designed to mitigate the risk to the lender in case the borrower is unable to make mortgage payments.

Here's how PMI works:

Purpose: PMI safeguards the lender, not the borrower. It provides financial protection to lenders in the event that a borrower defaults on their mortgage.

Payment Structure: Borrowers who are required to have PMI pay a premium for this insurance. This cost is typically incorporated into the monthly mortgage payment, making it a regular, ongoing expense until certain conditions are met.

Coverage: In case of loan default, PMI coverage pays a portion of the outstanding mortgage balance to the lender. It's important to note that while PMI protects the lender, it does not cover any equity the borrower may have in the home, nor does it prevent the borrower from facing potential foreclosure proceedings in the event of non-payment.

Cancellation: Once the borrower builds up sufficient equity in the home (usually when the mortgage balance falls below 80% of the home's original appraised value or purchase price), they may request the cancellation of PMI. Additionally, under the Homeowners Protection Act, lenders are generally required to automatically terminate PMI when the mortgage balance reaches 78% of the original value, provided the borrower is in good standing.

Understanding PMI and its implications is crucial for borrowers, as it represents an additional cost in the home-buying process. However, it also enables many individuals to purchase a home sooner than they might otherwise be able to by reducing the lender's risk associated with a smaller down payment.