What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance or “PMI” policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn’t worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%. Premiums are usually paid monthly and typically cost around one-half of one percent of the mortgage loan. You can normally cancel the PMI once your equity in the house reaches 20-25%, so long as you have made timely mortgage payments.
Private mortgage insurance (PMI) can help you get into the home you want by enabling you to pay less than the typical 20% down payment. This is particularly helpful for younger buyers who haven t had years to save but want to enjoy the tax benefits and investment aspects of home ownership. PMI is insurance that pays the mortgage in the event that you can t or that you default on the loan. It is protection for the lender who is taking a greater risk with a borrower who has less equity. Lenders have discovered through experience and research that there is a definite correlation between the amount of money a borrower has put into the home and the rate of default on loans. The more equity, the lower the rate of default. Here is an example of how it works: If a couple has $10,000 in the bank, then they can buy a $50,000 home if they have to pay a 20% down payment. If they don t have to pay 20%, then that same $10,000 can be a 10% down payment on a $100,000 house or a 5% down payment on a $2
Private Mortgage Insurance is placed on a mortgage at the time of origination if certain underwriting criteria is not met. This is often specific to an insufficient down payment. A PMI premium is collected monthly as part of the mortgage payment and is paid to the insurance company either annually or monthly according to the terms of the policy.
Mortgage insurance is required on all conventional loans where the member either has less than 20% equity in the property, in the case of a refinance; or less than a 20% down payment, in the case of a purchase. The lender will obtain the insurance and the fee will be included in the members’ monthly mortgage payment. It insures the lender against the members’ default on the loan.
PMI or Private Mortgage Insurance is normally required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. Private mortgage-insurance companies provide this insurance protection. It enables lenders to accept lower down payments than they would normally. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender’s losses in the unfortunate event of foreclosure. The wide-use of mortgage insurance has made it possible to buy a home without a 20% down payment! The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment.
