What is private mortgage insurance?

Mortgage insurance is a type of guaranty that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment.

If I have a good credit rating and can meet the required monthly mortgage payments, am I obligated to have private mortgage insurance?

Even when you have an excellent credit record and the capability to meet mortgage payments, most lenders require private mortgage insurance as a matter of policy for any loan with a small down payment. Mortgage insurance allows lenders to grant loans that they otherwise would not consider. In most cases, when you make less then a 20% down payment, the lender will require PMI (Private Mortgage Insurance).

Who pays for private mortgage insurance?

It is the lender who sends the premium to the mortgage insurer. Most often the lender's costs are charged to you and added to your monthly principal and interest payment (along with your property taxes and hazard insurance). For lender programs advertised as not requiring private mortgage insurance, higher lender costs are typically reflected in your interest rate and closing costs.

How will private mortgage insurance affect my monthly mortgage payments?

Minimally. Premiums are based on the amount and terms of the mortgage and will vary according to loan-to-value ratio, type of loan, and depth of coverage required by the lender.

Payment schedules for private mortgage insurance premiums may vary, depending on your lender. As part of Federal Truth-In-Lending regulations, lenders must identify all costs, including private mortgage insurance premiums, at the time of the loan application and when the loan actually closes.

Here is an example of how much a typical PMI premium plan will add to you mortgage payments, depending on the loan type.

The sample below assumes the borrower is putting 5% down on a home that is valued at $105,263. The interest rate is 8% on a 30-year mortgage. The loan amount is $100,000. The mortgage insurance coverage will be 30% of the loan. Remember, plans may vary from company to company and state to state. Most lenders require two months reserves for escrow.

How does private mortgage insurance differ from insurance programs offered by the FHA (Federal Housing Administration) government agencies?

Although the insurance protection concept is similar, there are advantages to using private mortgage insurance.

• Private mortgage insurers have much higher loan limits than FHA or VA.
• Private mortgage insurance is generally cheaper.
• Borrowers can expect faster loan approval, less paperwork, and more variety in premium plans when their lenders choose to buy private mortgage insurance.
• Private mortgage insurance is cancelable if charged to the borrower, meaning you will probably pay less for a low down payment loan insured by the FHA or VA.

When can the private mortgage insurance coverage be dropped?

The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value.

Is private mortgage insurance different from other kinds of insurance associated with mortgages?

Private mortgage insurance protects the lender in the event of borrower default and subsequent foreclosure on the home. FHA and VA insurance also protects the lender against borrower default under a government program rather than through the private enterprise system. Credit life insurance (sometimes called mortgage insurance) is life insurance coverage that pays off the mortgage in the event a borrower dies, becomes disabled, or incurs loss of health, according to the terms of the insurance policy. Fire, liability, and theft insurance cover the homeowner and lender from losses, according to the terms and conditions of their respective insurance policies.