What Exactly Is Mortgage Insurance?

The definition of mortgage insurance (also known as mortgage guarantee or PMI) is “an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer.”

Many people confuse PMI with homeowner’s insurance. These are actually very different!   Homeowner’s insurance insures the property: dwelling, personal property, other structures on the property, etc.  Mortgage insurance still offers protection, but not to you or your home….it’s for the bank who made the loan on your purchase.  In essence, mortgage insurance protects the bank from loss in case you, the new borrower, fails to make your payments, and the bank has to foreclose.  If the bank indeed finds it necessary to foreclose, then they will look to the mortgage insurance company to pay some of what the bank has lost on the home.

PMI is insurance that lenders require for borrowers seeking loans of more than 80% of a home’s purchase price. PMI protects the lender if default should occur, and enables homebuyers with down payments of less than 20% to purchase homes. Generally, if you put down 20% or more, you won’t need PMI.

Private mortgage insurance costs vary depending on the size of the down payment you’ve made and the type of home mortgage you’re getting. The advantage to you as a home buyer in having PMI is it may enable you to purchase a home with a lower down payment – a benefit for first-time home buyers. The cost of private mortgage insurance is generally a half of one percent of the value of the loan, so a $200,000 mortgage times .005 is $1000 or $83 a month added to your mortgage payment.

Most lenders will allow you to discontinue PMI once you’ve paid down 20 percent of the equity in your home, but it’s up to you to notify them when you reach this point.

If you have further questions regarding mortgage insurance, feel free to contact us.