Private Mortgage Insurance (PMI)
What is private mortgage insurance (PMI)?
Private mortgage insurance allows lenders to offer low down payment loans by insuring the top 15-20% of the loan against default. In other words, this type of insurance protects the lender in a low money down loan, by insuring the amount loaned over 80% to a borrower.
Who pays for private mortgage insurance (PMI)?
The borrower pays the premium for PMI and usually does so by paying a percentage at closing and a monthly premium along with their mortgage payment.
Does the insurer insure the full mortgage amount in a private mortgage insurance policy?
No, they only insure above a certain percentage. For example, say a borrower borrows $95,000 on a property they purchased for $100,000. The lender would require the buyer to buy private mortgage insurance to cover the amount they owe above $80,000 to $95,000, which is $15,000. The buyer put $5,000 or 5% down on the loan.
Private mortgage insurance is offered by many national insurance companies.
Does a borrower have to pay for this insurance as long as they own the property?
No, once a borrower reaches a certain level of equity in a property, the lender will allow them to drop this coverage. Usually, the amount of equity required to be achieved is 20% before a lender will let a borrower drop the private mortgage insurance.
Is private mortgage insurance or (PMI) the same as mortgage insurance?
No, mortgage insurance is not PMI, it is an optional policy purchased by a borrower who is concerned they may die or become disabled and will be unable to make their mortgage payments. If the borrower dies, the insurer will pay a death benefit to the lender to pay off their mortgage. If the borrower becomes disabled, the insurer will pay a monthly benefit while they remain disabled to be used to make their mortgage payment until they recover.
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