What typically triggers the need for private mortgage insurance?

The need for private mortgage insurance (PMI) is typically triggered when a borrower's loan-to-value (LTV) ratio exceeds 80%. This means that the borrower is financing more than 80% of the home's value. Lenders require PMI in such scenarios because a higher LTV ratio indicates a higher risk for the lender. When a borrower makes a smaller down payment (less than 20%), there is less equity in the home, which increases the likelihood of default. PMI protects the lender from potential losses in the event of the borrower's default by covering a portion of the loan balance.

In contrast, having any mortgage amount does not automatically require PMI; it’s the ratio of the loan relative to the home’s value that is critical. Similarly, while mortgage amounts exceeding $1 million can prompt certain considerations, they do not inherently necessitate PMI unless the LTV also exceeds the threshold. Home equity loans above 90% might raise concerns for the lender, but PMI is generally associated more with the primary mortgage when the LTV at origination is greater than 80%. Therefore, understanding the relationship between LTV and PMI is essential for both lenders and borrowers in managing risk in real estate financing.