What is Private Mortgage Insurance?

Private mortgage insurance (PMI) is a type of insurance that protects mortgage lenders from financial losses in the event that the borrower defaults on their loan. PMI is typically required by lenders when a borrower makes a down payment of less than 20% on their home. It is an additional cost that is added to the borrower’s monthly mortgage payment.

How Does Private Mortgage Insurance Work?

Private mortgage insurance is designed to protect the lender, not the borrower. If the borrower defaults on their loan, the lender can submit a claim to the PMI provider to recover their losses. The amount of coverage provided by PMI varies, but it is typically based on a percentage of the loan amount.

PMI is usually required until the borrower has paid off a certain percentage of their loan amount or until the home’s equity reaches a certain level. Once the PMI coverage is no longer needed, the borrower can request that it be removed from their monthly mortgage payment.

How Much Does Private Mortgage Insurance Cost?

The cost of private mortgage insurance varies depending on a number of factors, including the size of the down payment, the loan amount, and the borrower’s credit score. Typically, PMI costs between 0.3% to 1.5% of the loan amount per year. This means that a borrower with a $200,000 loan could expect to pay between $600 and $3,000 per year for PMI.

Why is Private Mortgage Insurance Required?

Private mortgage insurance is required by lenders to protect themselves from financial losses in the event that a borrower defaults on their loan. Lenders are more likely to approve loans with smaller down payments when PMI is in place, as it helps to mitigate their risk.

Without PMI, lenders would require borrowers to make larger down payments, which could make it more difficult for some people to afford a home. PMI allows borrowers to make smaller down payments and still qualify for a mortgage.

Who Benefits from Private Mortgage Insurance?

The primary beneficiary of private mortgage insurance is the lender. PMI protects the lender from financial losses if the borrower defaults on their loan. However, there are some benefits to PMI for borrowers as well.

For example, PMI can help borrowers qualify for a mortgage with a smaller down payment. This can be particularly helpful for first-time home buyers or those who do not have a large amount of money saved up for a down payment.

How Can I Get Rid of Private Mortgage Insurance?

There are a few ways to get rid of private mortgage insurance:

• Pay down your mortgage: PMI is typically required until you have paid off a certain percentage of your loan amount. Once you reach that threshold, you can request that the PMI be removed from your monthly mortgage payment.
• Refinance your mortgage: If your home’s value has increased since you purchased it, you may be able to refinance your mortgage and get rid of PMI. This is because your new loan-to-value ratio (LTV) will be lower, which may make PMI unnecessary.
• Request cancellation: If you believe you have met the requirements to have PMI removed, you can request that your lender cancel the insurance. You will need to provide proof that you have met the requirements, such as a record of on-time payments.

FAQ

What is the difference between private mortgage insurance and mortgage protection insurance?

Private mortgage insurance protects the lender from financial losses if the borrower defaults on their loan. Mortgage protection insurance, on the other hand, is designed to protect the borrower by covering their mortgage payments in the event that they become unable to work due to illness or injury.

Can I get private mortgage insurance if I have a low credit score?

Private mortgage insurance is available to borrowers with lower credit scores, but the cost may be higher. Borrowers with low credit scores may want to work on improving their credit before applying for a mortgage to qualify for lower rates and fees.

Do all lenders require private mortgage insurance?

No, not all lenders require private mortgage insurance. Some lenders may offer other options, such as piggyback loans, which allow borrowers to avoid PMI by taking out a second loan to cover part of the down payment.

Is private mortgage insurance tax-deductible?

In some cases, private mortgage insurance may be tax-deductible. It is important to consult with a tax professional to determine whether or not you are eligible for a deduction.