What is Private Mortgage insurance?
Private mortgage insurance can help you buy a house with a low down payment — less than 20%. If you stop making house payments for any reason, mortgage insurance protects your lender from financial loss. Because lenders have this insurance, they are able to offer more mortgage loans with low down payments.
WASHINGTON (MarketWatch) — Question: Please write an article on this PMI insurance. I’ve tried to find information on it, but the banks don’t seem to have any brochures. My feeling is that it is a bum deal! O. Simons Answer: Au contraire. For almost 50 years, private mortgage insurance, or PMI, has been a necessary evil for any prospective homeowner who has been unable to accumulate the requisite 20% down payment that makes lenders most comfortable. Studies show that borrowers who put up anything less than 20% of the purchase price are far more likely to default than those who have more of their own money riding on the deal. Enter PMI, which assumes part of the extra risk lenders take in making a mortgage with less than 20% down. If you should fail to make your payments and the lender is forced to foreclose, the insurance company will cover part of the lender’s loss. Of course, this doesn’t come without a cost. PMI can add up to a couple of hundred dollars a month to your house paymen
The name sounds posh, but don’t let the spiffy name trick you. Private mortgage insurance works a bit differently than other forms of insurance like health or life insurance. To understand how it’s different, you first have to understand what it is. Investopedia.com defines private mortgage insurance, which is sometimes abbreviated as PMI, as “A policy provided by private mortgage insurers to protect lenders against loss if a borrower defaults.” Yes, you read that correctly; private mortgage insurance is insurance coverage for your mortgage loan provider on which you pay the premium. That’s the first difference. The second major difference between private mortgage insurance and many other forms of insurance is that PMI is not optional. A mortgage lender can require that you, as a homebuyer, pay private mortgage insurance if you do not or cannot afford to make at least a 20% down payment towards the purchase of your home. Though many aspects of your mortgage loan may be negotiable, PMI
