Friday, December 22nd, 2006
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Private Mortgage Insurance, or PMI, is a type of insurance that insures the lender in case the buyer defaults on a specific loan. If the buyer defaults, the Insurance company will pay the lender for the portion of the loan that is insured. PMI is usually required by the lender or bank when buyer purchases a house with less than a 20% down payment.
This insurance protection is provided by private mortgage-insurance companies and enables lenders to accept lower down payments than they would normally accept. This allows a buyer to purchase a more expensive house without having to save up the required 20% down payment. However, the cost of PMI increases as a buyer’s down payment decreases, so, in a lot of cases, buyers want to try to put down as much as possible.
PMI premium is collected monthly along with the monthly payment. As the home’s equity increases, the buyer may qualify to have PMI removed. PMI does not give additional homeowners insurance coverage, but it does give the bank insurance just in case a buyer does not fulfill obligations (i.e. failure to make all mortgage payments).
If a buyer would like to cancel the PMI insurance at any point, he/she must get approval from the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. It is also noteworthy that some lenders may require buyers to pay PMI for one or two years before they may apply to remove it.
You can find additional information on PMI, such as how to avoid paying a PMI, here.
You can also compare loan providers to find a lender that fits your needs. And be sure to utilize our loan glossary and loan FAQ for explanations of any loan-related terms and answers to commonly-asked questions about loans.
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