Private Mortgage Insurance is a type of insurance that is often required by lenders if the borrower has less than 20% for a down payment. Private Mortgage Insurance, or PMI, is different from Home Owners Insurance and may also be required if the borrower has poor credit.

Traditionally, lenders have required a 20% down payment when purchasing a home. This showed the bank that the individual was committed to purchasing and paying for the home. There are actually a number of benefits of having a 20% down payment, among them it is usually possible to get a better interest rate, but for many coming up with a 20% down payment is not possible.

In 1957, a small insurance company called MGIC, decided to start insuring individuals who did not have enough money to pay the 20% down payment. A number of other insurance companies quickly followed MGICs lead and Private Mortgage Insurance was born.

If something happens and the borrower is unable to pay for the home, the Private Mortgage Insurance helps cover some of the cost of the home. In return, the homeowner must pay a monthly payment to the PMI company in addition to the traditional mortgage payments.

In some cases the bank may include the cost of PMI in the monthly mortgage payment, but it might also be a separate payment paid to the insurance company.

Usually, once the borrower has paid off 20% of the mortgage in the home, the bank will no longer require Private Mortgage Insurance, or Drop the PMI. This can actually happen in one of two ways. Either the homeowner will actually pay off 20% of the principal value of the mortgage, or the homes value will increase.

When a homes value increases, the equity of the home also increases. Equity is the difference between what is owed on the home and how much the home is worth. So, if the homes value increases and the homeowner sells it, what they get to keep after paying the mortgage company is the equity.

While most banks and lenders will no longer require Private Mortgage Insurance after the equity increases, it is usually on the homeowner to provide proof of an increase in value and speak with the bank. The bank will not usually offer to drop the Private Mortgage Insurance, instead this is something the borrower will probably specifically have to request.

Usually PMI is only required when the borrower has less than 20% for a down payment, but not all banks require PMI. Some credit unions and community banks will be more inclined to work with their customers on a personal level, although this is not always the case.

When receiving an FHA Loan, which is offered by the Federal Housing Administration to those with lower incomes or bad credit, often only a 3% down payment is required, but PMI is also a requirement of an FHA Loan.