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What is private mortgage insurance?
Private mortgage insurance 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?
Private mortgage insurance 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?
They believe there is a correlation between borrower equity and default. They have found that the less money borrowers
put down, the more likely they are to default on a loan.
How much does private mortgage insurance cost?
Private mortgage insurance is typically financed by a small fee at the outset and a monthly premium. 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 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.
Is private mortgage insurance the same things 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. Private mortgage insurance does not pay any sort of benefit to you as the borrower. Instead,
private mortgage insurance 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. |
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