What is private mortgage insurance?

Private Mortgage Insurance (PMI) is a type of insurance that protects the lender in the event that a borrower defaults on their mortgage. This insurance is typically required when a borrower makes a down payment of less than 20% on a home. The reason for this is that borrowers who make a smaller down payment are considered to be a higher risk to the lender, and PMI helps to mitigate that risk.

Benefits of PMI

PMI has several benefits for both borrowers and lenders. For borrowers, it allows them to purchase a home with a smaller down payment, which can make homeownership more accessible. For lenders, it provides an added layer of protection against loss in the event of a default.

PMI works by requiring the borrower to pay an additional monthly premium, which is typically added to the borrower’s mortgage payment. The premium is based on the loan-to-value ratio (LTV) of the mortgage, with higher LTVs resulting in higher premiums. The lender then uses the premiums collected to cover any losses that may occur in the event of a default.

Removing PMI

There are several ways that PMI can be removed. One way is for the borrower to make additional payments to the mortgage, which can help to reduce the LTV and make the borrower eligible for PMI cancellation. Another way is for the borrower to refinance their mortgage, which can also help to reduce the LTV and make the borrower eligible for PMI cancellation. Additionally, some lenders may automatically cancel PMI when the loan balance reaches 78% of the original value of the home, while other lenders might require a formal request and an appraisal of the home to verify the value of the home and the loan-to-value ratio.

In summary, Private Mortgage Insurance is a type of insurance that protects the lender in the event of a default on a mortgage. It is typically required when a borrower makes a down payment of less than 20% on a home and is added to the borrower’s mortgage payment each month. It has benefits for both borrowers and lenders, as it allows for more accessibility to homeownership for borrowers and provides added protection for lenders. PMI can be removed through additional payments, refinance, or reaching a certain loan-to-value ratio and having the lender cancel it.