What is Private Mortgage Insurance?

 

private mortgage insurance, PMI, mortgage, mortgage insurance, fixed rate mortgage, adjustable rate mortgage, home loans

The following is a guest post. Enjoy!

What is Private Mortgage Insurance?
Private mortgage insurance is an insurance product that is taken out by a borrower, but is payable to the lender.  It is insurance designed to offset losses in the case where a borrower isn’t able to repay the loan and the lender worries that it may not be able to recover its costs after foreclosure and sale of the property.
Private mortgage insurance is typically used in situations where the borrower isn’t able to put enough down to satisfy the lender’s risk requirements.

When You Need Private Mortgage Insurance

Private mortgage insurance is used when the lender believes there will be risk in recouping the cost of the loan.  This typically applies when the down payment is less than 20% of the appraised value.  However, it can also change based on the loan term, loan type, total amount financed, and more variables.  It also is not needed for many government-backed loans, like FHA, since the loan is insured against loss by the government rather than the homeowner.

How Private Mortgage Insurance Works

Private mortgage insurance is typically required by lenders when there is not an 80% loan-to-value ratio on the property.  If you don’t meet this criteria, you will need to purchase private mortgage insurance.
Private mortgage insurance typically costs around $55 per month for each $100,000 financed.  Usually, your loan servicer will provide a list of qualified mortgage insurance providers, and you will need to select one and have the policy in place upon close of escrow.
You can cancel your private mortgage insurance when your loan has an 78% loan-to-value ratio.  This can occur either by principal repayment, or by the house appreciating in value (or both).  Only the servicer can decide if the 78% ratio has been reached, but you can ask them for an appraisal if you think it has been made.
A great thing is that, since 2007, private mortgage insurance premiums are tax deductible, just like mortgage interest.  This made it cheaper for borrowers to get private mortgage insurance, instead of having to rely on complex financing.

How about you all? Do you currently have insurance on your home mortgage loan? If so, does it provide you with any additional benefits aside from the implied financial protection?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/68751915@N05/6869769579/sizes/l/in/photostream/

Comments

  1. I made sure I had 20% down so I didn't have to get PMI. It is an additional cost that just isn't worth it to me. Instead I got a house I could easily afford so it wasn't an issue.

    • Nice work Lance! When you were going through the loan-obtaining process, I'm curious – would it have been pretty easy to obtain a loan with less than 20% down, say 10%?
      My recent post The Pros and Cons of a Down Payment Assistance Program

  2. We are buying our first house with a USDA guaranteed loan, but are still required to have mortgage insurance. Our lender calls it a “guarantee fee”, but it's the same thing really. It's .3%, so that's not as bad as others have told me about. 🙂

    -Jen
    My recent post Spending & Saving: Money & Our Kid

  3. I've always been opposed to paying PMI. My thought is that if you're having to pay PMI, you should continue saving before you purchase. BUT it does allow a lot of people that wouldn't normally be able to purchase a house purchase a house.
    My recent post What is Supply Trade Finance?

  4. NsuranceStraightTalk says:

    I really like the PMI. This would surely fit those people who have no enough cash for a 20% d/p. However, if you can save money for the purchase of your dream house that would be great. But I will surely recommend you PMI.

    • Thanks for reading Straight Talk. I was curious – in the insurance industry, how profitable is PMI compared to the other forms of insurance?
      My recent post The Pros and Cons of a Down Payment Assistance Program

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