What is PMI and why do lenders require it?

Private mortgage insurance, or PMI, protects the lender, not the borrower, if a borrower defaults on a conventional loan made with a smaller down payment. Lenders require it because a smaller down payment leaves less equity cushion if the borrower stops paying and the home has to be sold in foreclosure. PMI can typically be removed once the borrower builds enough equity, either through payments or rising home value, without refinancing the loan. A lender can explain the specific PMI cost and removal rules that apply to a particular loan program.