What is PMI Insurance?

PMI or Private Mortgage Insurance is a system that allows borrowers to purchase a home with less than a twenty percent down payment. PMI was created to protect the lender in case the borrower defaults on the loan. When a borrower applies for a loan with less than the average twenty percent down payment, the lender is at higher risk that the borrower may not be able to pay the mortgage. Therefore, Private Mortgage Insurance is required by the lender to offer them some protection from a total loss.

How much will it cost?

The cost of PMI will vary depending on the lender, but generally, the monthly payment of the Private Mortgage Insurance is figured at one half of one percent of the total cost of the loan. For example, if a borrower applies for a $150,000 mortgage and pays a ten percent down payment ($15,000), $145,000 would be multiplied by .005 to reach the annual PMI premium of $725. The annual premium would then be divided by 12, and the monthly payment, $60.42 in this case, would be added to the borrower's monthly mortgage payment.

What are the advantages and disadvantages of PMI?

The advantage to Private Mortgage Insurance is that it gives borrowers who cannot make a sizeable down payment the opportunity to still obtain a mortgage. The disadvantage is that it will mean making the extra monthly payment. However, once the lender pays the principal of the mortgage down to eighty percent of the home's value, he or she can then apply to have the PMI removed, and, legally, lenders must cancel PMI when the principal balance of the loan reaches 78% of the home's value.

Private mortgage insurance is an excellent way to allow borrowers to achieve their home ownership dream, while, at the same time, it protects the lender.