All About Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) is a financial instrument that can be used by potential homebuyers to get into a home that they, otherwise, would not be able to afford. Basically, PMI acts as a safety net for lenders who want to process a loan for a borrower who does not have the 20 percent down payment that is usually required to qualify for a mortgage. This insurance is typically used by first time home buyers and can get a qualified borrower into a home with as little as 3-5 percent down.

pmiIn order to understand the details of Private Mortgage Insurance it is important to understand the motivation of lenders. Lenders are in business to make money and borrowers who have a down payment of less that 20 percent are most likely to default. If a lender approves too many loans to unqualified borrowers they open themselves up to risk if those loans begin to default.

Normally the lender that you are dealing with will provide you with information on a PMI policy and will secure it for you. The initial cost of the PMI can either be added to your closing costs or tacked onto your monthly mortgage payments. This mortgage insurance can range in price from ½ to 1 percent of the loan amount each year. Borrowers will need to continue to make mortgage insurance payments until they have reached the 20 percent equity threshold.

The Homeowners Protection Act passed in 1998 contains a number of provisions to protect the interests of PMI borrowers. The main provision of the act calls for the automatic termination of the policy when the borrower reaches 22 percent equity in their home (based on the original property value). There are also provisions that require the lender to provide the borrower with information on termination and cancellation of the policy.

If you would like more information on a Private Mortgage Insurance policy and how it can help you get into your dream house today let me know and I can recommend a qualified lender.

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