Private Mortgage Insurance - Over the past two or three decades home prices have increased faster than household incomes. As a result it has been more and more difficult for first time home buyers to save enough money for a down payment. Also, the time required to save the down payment has become longer. In response the mortgage industry has developed a number of low down payment or no down payment mortgage loans.
These low down payment mortgages have allowed many people to break the cycle of home prices increasing faster than available savings and assisted them in developing equity as the value of their new home increases. However, experience has shown mortgage lenders that there is increased risk of default when a borrower has a relatively small amount of equity in their home. Private Mortgage Insurance (PMI) is one of the mortgage lender's solutions to protect against this higher risk of default.
Mortgage Lenders require PMI on most conventional mortgages when the borrower's equity in the home is less than 20%. PMI protects the Lender against loss in the event a borrower defaults on their mortgage payment. PMI should not be confused with mortgage life insurance. PMI allows people to purchase homes with a small or no down payment. Mortgage life insurance pays all or a portion of the borrowers mortgage balance in the event of a homeowner's death.
PMI can usually be cancelled by the borrower once he or she has attained at least 20% equity in the home and following an initial minimum time period. The guidelines for canceling PMI are set by investors and may vary from investor to investor. Investors typically require an appraisal on the home to verify that the 20% equity requirement has been met. Borrowers should contact their mortgage lender to learn the exact procedure to cancel their PMI once the 20% equity level is met.
In summary, PMI allows buyers to purchase homes with no or a low down payment by protecting the Lender against the increased risk of default. Other approaches are also available for qualified borrowers such as purchase money home equity lines of credit. (HELOC)
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