What is private mortgage insurance?
Private mortgage insurance (PMI) is an insurance policy that protects the lender in the event you are unable to repay your mortgage loan in full and the home cannot be sold for enough to pay off what you owe. It ensures the lender will be made whole if you should default on the loan.
Why do I need private mortgage insurance?
If the down payment on your home is less than 20 percent of the value of your home, you likely will need to carry private mortgage insurance. But private mortgage insurance also makes it possible for you to make a much smaller down payment and still qualify for the loan.
How does private mortgage insurance work?
PMI is purchased by the buyer to protect the lender against any loan default. It typically appears as on your monthly mortgage statement. With most lenders, you can ask to cancel the insurance once you are able to pay off 20 percent of the principal balance on the loan, or your home appreciates enough in value that you have 20 percent equity in the home.
How much does PMI cost?
There are many companies that offer private mortgage insurance, and their rates can vary. Your lender will choose the insurer. You will pay the same amount every month until you are able cancel the insurance or pay off the loan.
Do not confuse private mortgage insurance with these other insurance types common to buying a home:
- Owner’s title insurance protects your financial interest in the house in the event someone sues and says they have a claim against the house dating from before you purchased it.
- Lenders title insurance protects the lender’s financial stake in the property if ownership of the property is contested after the purchase.
- Homeowners insurance provides coverage to repair or replace your home and its contents in the event of damage.
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