Private Mortgage Insurance Explained

When many borrowers hear “mortgage insurance,” they tend to think, “hey – that’s great!  I’ll be protected in case I can’t pay my mortgage!” However, this mortgage insurance is not in place to protect borrowers.  Rather, it’s put into place to protect lenders.

Experience has shown lenders that borrowers with less than 20 percent down tend to default on their loans more often.  So, lenders require those borrowers to pay a monthly fee to cover an insurance policy that in turn, protects  – or insures – them in case you can’t meet your financial obligations.

Say you’re getting a mortgage and are prepared to put 5 percent down on your home. The lender requires any borrower putting down less than 20 percent to pay for an insurance policy that protects them in case the borrower becomes unable to pay on the loan. In this scenario, you’ll likely pay a set fee per month as part of your mortgage payment to cover this insurance.

Should you at any time default on your mortgage loan, the lender would benefit by receiving the 15 percent you did not pay as part of your down payment at closing.  Remember – 80 percent.  That’s the magic number lenders feel comfortable lending without requiring PMI.

Ending Your PMI Payments

The Homeowner’s Protection Act of 1998 requires lenders to automatically suspend PMI billing once you’ve attained 22 percent equity in your home.  However, once you have paid on your mortgage to a point where you have the required 20 percent accumulated, you can and should request that the PMI fees you pay each month be suspended.

If you have any questions about Private Mortgage Insurance, you may post your question here by using our “comment” link below, and we’ll get back to you with answers. If you need to speak to a mortgage professional, contact us and we will be happy to refer you to several lenders who can answer your questions for you.