Mortgage Insurance

For most first time home buyers, saving enough money for a sizeable down payment is the greatest barrier to home ownership. Traditionally, lenders have required a down payment of at least 20 percent of the home's purchase price. However, lenders will approve a mortgage with a smaller down payment if the mortgage is covered by private mortgage insurance.

Private mortgage insurance is insurance that protects a lender in the event that a homeowner defaults on a loan. Lenders generally require mortgage insurance on low downpayment loans because experience and studies show that a borrower with less than 20 percent invested in a house is more likely to default on a mortgage. In effect, the mortgage insurance company shares the risk of foreclosure with the lender.

What is Mortgage Insurance?

What is PMI and why do mortgage lenders require it.

Mortgage insurance is a type of insurance that helps protect lenders against losses due to foreclosure. This protection is provided by private mortgage insurance companies, such as PMI Mortgage Insurance Co., and allows lenders to accept lower down payments than would normally be allowed.

Mortgage insurance also enables lenders to grant loans that would otherwise be considered too risky to be purchased by third party investors like the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). The ability to sell loans to these investors is critical to maintaining mortgage market liquidity, which in turn, allows lenders to continue originating new loans

Can I Cancel Mortgage Insurance?

If you have to get PMI, you do not need it forever. Read how to cancel PMI.

Mortgage insurance can usually be canceled by the home buyer after he or she has at least 20 percent equity in the home. Borrowers should contact their servicer to find out the procedure for canceling mortgage insurance when they think they have achieved 20 percent equity. Guidelines for canceling private mortgage insurance are set by investors. Typically, investors will require an appraisal on the property. The servicer can recommend qualified local appraisers.

Payment Options

PMI give you several options, most people choose to add it to their monthly mortgage payment.

Private mortgage insurance can be paid on either an annual, monthly or single premium plan. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to- value ratio, type of loan, and amount of coverage required by the lender.

Under an annual plan, an initial one year premium is collected up front at closing, with monthly payments collected along with the mortgage payment each month thereafter. Monthly plans allow a borrower to pay the lender only 1 or 2 months worth of premium at closing, and then on a monthly basis along with the regular mortgage payment. Under a single premium plan, the entire premium covering several years is paid in a lump sum at closing. Typically, homebuyers choose to add the amount of the lender's mortgage insurance premium to the loan amount. By doing this, homebuyers can reduce their closing costs and increase their interest deduction.