Understanding private mortgage insurance

For various reasons, you might be perceived as a financial risk. This means that lenders think that you might not be willing or able to repay your mortgage. To protect themselves from this risk, lenders will often require that risky borrowers purchase private mortgage insurance (PMI). In this way, lenders receive assurance that loans they grant will be repaid.

Just as health insurance pays for your care in an emergency, private mortgage insurance will pay for your mortgage if you cannot. For this protection, you will pay a monthly fee, otherwise known as a premium. Premiums are calculated according to various factors.

PMI is often required for borrowers who have had past issues with their credit record. If, for instance, a borrower has defaulted on past loans, a mortgage lender has good reason to believe that the borrower might default on future loans. Sometimes, borrowers can pay a high down payment in order to have the insurance requirement waived.

Furthermore, you might be required to purchase PMI if you cannot afford to pay a standard down payment. In fact, unless you are eligible for a government-sponsored loan program, you will probably be required to hold PMI if your down payment is under twenty percent.

Fortunately, even if your lender requires private mortgage insurance, you will only have to hold it for a relatively short time. After you have built a sufficient amount of equity in your house, you are allowed to drop PMI. Typically, your lender will let you know how long this will take toward the beginning of your mortgage.