What is Private Mortgage Insurance?
Private mortgage insurance, or PMI, protects a mortgage lender from financial loss in the event that a borrower defaults. Borrowers are typically required to purchase mortgage insurance when they are borrowing more than 80% of their new property’s value. In other words, buyers with a down payment of less than 20% are normally required to purchase mortgage insurance. The borrower pays the premium, but the lender receives the protection. In exchange for this added protection, the lender will let the buyer borrow more than 80% of the value of his new property.
What are the benefits of private mortgage insurance?
PMI plays a very important role in the mortgage industry. It protects lenders against borrower defaults and offers people with relatively small amounts of cash the chance to become homeowners. With mortgage insurance, a borrower can buy a house with a very small down payment.
Why do lenders require borrowers to purchase private mortgage insurance?
Because industry statistics demonstrate that those borrowers who put less money down, are more likely to default on a loan.
How much does private mortgage insurance cost?
PMI is typically financed by a small fee at the outset of the loan and a monthly premium thereafter. For one year of coverage, a borrower will typically pay something equal to 0.2% to 1% of the total loan balance. The loan’s duration and structure factor heavily into this determination. Adjustable rate mortgages, for example, will have higher mortgage insurance premiums attached to them than fixed-rate mortgages. Mortgage insurance costs can be reduced if the borrower has the insurance coverage removed early. Many people do not realize that mortgage lenders no longer require private mortgage insurance after enough equity has built up in the property. You may use a PMI calculator to get an idea how much private mortgage insurance will cost.
Is private mortgage insurance the same thing as mortgage life insurance?
No. Mortgage life insurance pays all or a portion of your mortgage in the event of your death. Private mortgage insurance is something entirely different. PMI does not pay any sort of benefit to you as the borrower. Instead, PMI pays a benefit to your mortgage lender in the event that you default on your loan. The sole benefit provided to the borrower by private mortgage insurance is the lender’s willingness to issue a mortgage that exceeds 80% of a property’s purchase price or appraised value.
If you have more questions about private mortgage insurance and how it can help you put down a smaller down payment, schedule your own free, no-obligation consultation in our Hartford office by calling toll free at 888-336-1212 between 9:00 and 5:30 Monday through Friday, or by clicking here to use our interactive calendar.