 TITLE: What Is Private Mortgage Insurance? CONTENT: How Does Private Mortgage Insurance Work?\n-----------------------------------------\nLenders who issue conventional mortgages (home loans that aren't government-backed) typically want borrowers to put up 20% of the cost of the home as a cash down payment. In the world of financial institutions, this is expressed in an inverse way: Lenders prefer to issue loans for no more than 80% of the market value of the home. The percentage of the home's value represented by the amount of the loan is called loan-to-value (LTV) ratio:\nLTV =\nMortgage Loan Amount\n* * *\nAppraised Home Value\nOn a $300,000 home, a borrower putting down 20% ($60,000) would require a loan of $240,000, yielding an LTV ratio of 80%. If a borrower put 15% down on the same home ($45,000), they would require a $255,000 loan—an LTV ratio of 85%.\nLenders seek 80% or lower LTV ratios as a precaution in case the borrower fails to repay the loan. Each mortgage loan is secured by the home itself, but if a borrower fails to pay and the lender is forced to take the home through foreclosure, there can be steep costs associated with re-selling it. Lenders can use down payments to help cover those expenses.\nComing up with a 20% down payment is difficult for many borrowers, especially those trying to enter the housing market for the first time. In light of this, lenders devised private mortgage insurance (PMI) as a way to issue mortgages with LTV ratios greater than 80%. When lenders issue loans with LTV ratios greater than 80%, they require you to purchase mortgage insurance to cover the difference between the amount you put down at closing and a 20% down payment.\nIn our hypothetical $300,000 home, if you made a 10% down payment (LTV = 90%), you'd need PMI coverage for $30,000, the amount of additional down payment you'd need for an LTV ratio of 80%.\nWhen PMI is required, the lender secures a policy through one of the six companies currently offering mortgage insurance in the U.S. Borrowers have no vote in the choice of PMI provider, so there's no opportunity to compare pricing. END