Private Mortgage Insurance or PMI is insurance to protect the lender in the event that a homeowner defaults and the lender is forced to foreclose. PMI comes in three flavors and, depending on loan type, can be paid upfront, monthly and/or financed into the home buyer's interest rate or loan amount.
Upfront PMI is insurance that is paid or financed along with the loan amount at the time of closing, depending on the loan program and its requirements. In some cases, the upfront PMI is also referred to as a Guarantee or Funding Fee, as in the case of loans guaranteed by the USDA Rural Development or VA. In the case of an FHA loan, mortgage insurance is called the Mortgage Insurance Premium or MIP. In lieu of being paid on a monthly basis for loans sold to Fannie Mae and Freddie Mac (conventional loans), a borrower can choose to finance their PMI when allowed by the lender.
In addition to upfront MIP, monthly MIP is also required for FHA loans and for USDA loans. However, for VA loans no monthly mortgage insurance is required.
With conventional loans where not financed or paid upfront, PMI can be paid on a monthly basis either separately or in exchange for Lender Paid Mortgage Insurance (LPMI). Where offered, LPMI results in the borrower paying a slightly higher interest rate.