Private Mortgage Insurance (PMI) is required when the down payment is less than 20 percent of the purchase price of the home.
PMI protects the lender in case the borrower defaults on the loan. When a borrower puts down less than 20 percent, the lender sees it as a higher risk because there is less equity in the home.
Here's an example: If you want to buy a house for $200,000 and you only have $10,000 (which is 5 percent) to put down, you would need to pay for PMI. On the other hand, if you had $40,000 (which is 20 percent) to put down, you would not need to pay for PMI because you have reached the 20 percent threshold.
Therefore, when the down payment is less than 20 percent of the purchase price of the home, PMI is required to protect the lender in case of default.
