Categories: Finance

What is Private Mortgage Insurance (PMI) and Benefits?

Table of Contents

Private Mortgage Insurance

PMI is a policy that saves your lender in the case that you default on repaying the loan. It covers all or some part of your remaining mortgage balance and it sometime required. Private mortgage insurance has been a part of some home loans since 1957.It guarantees the lender that its loan will be paid so such a policy assist borrowers get approved for a loan otherwise they disqualify for. This insurance is often required if you make a down payment of less than 20 percent.

Pros and Cons of Private Mortgage Insurance

There are both positive and negative effects of Private Mortgage Insurance.

Pros

Allows you to make a smaller down payment
May make it easier to qualify for a mortgage

Cons

May increase your closing costs
provides no protection for the borrower
May increase your monthly mortgage payment

How Private Mortgage Insurance Works

In this insurance policy borrower paying premium to cover damages should any kind of disaster occur.The insurance company is liable to paying off your loan if for some reason you find yourself unable to do so.

Mortgage Insurance Protection vs Private Mortgage Insurance

Mortgage Insurance Protection

Insures the borrower
Cover some mortgage payments
Is a voluntary election by the borrower
May pay in the event of the borrower death, Job loss or disability

Private Mortgage Insurance

Insures the lender
Is sometimes requirement of lender
Insures against total default on loan
Pays in the event of foreclosure

Do I have to Pay for Mortgage Insurance

Your lender will detail your PMI premiums on your initial loan estimate as well as on your final disclosure form.You can expect to pay your premium either upfront at closing, monthly as a part of your mortgage payment or both.

Private Mortgage Insurance Key Point

PMI is included in mortgage payments so it can make them higher than they otherwise would have been
PMI is required When homebuyers make less than a 20% down payment on the loan
PMI protects lender against potential default by borrowers.
PMI offers borrowers a better chance of being approved for a mortgage if they do not have a lot of money to put down or their credit is less.