Question: When is private mortgage insurance (PMI) required, and who pays?

Answer: For owner-occupant buyers of residential real estate whose down payment is less than 20% of the purchase price, lenders will require the borrower to obtain private mortgage insurance (PMI) as a condition for funding the loan. PMI covers the lender for the risk of loss on a default by the buyer.

In most cases the buyer pays the PMI premiums, even though the lender is the insured holder of the policy. However, some PMI carriers and lenders offer Lender-Paid Mortgage Insurance (LPMI) programs. Lenders pay the mortgage insurance premium either in a lump sum or on a monthly basis, as issued by the PMI carrier. As a result, the borrower pays a higher interest rate on the principal.