Private Mortgage Insurance :: Mortgage Protection Insurance :: PMI & Propertry Insurance

Mortgage Lending Guide: Private Mortgage Insurance

Simply put, it is insurance on your mortgage.

Private Mortgage Insurance (PMI) is a policy you buy for the benefit of your lender. It insures a portion of their risk in the event that you default. All lenders require PMI when your loan is 80% of the purchase price or more - even if the house has a higher appraised value at the time of closing.

PMI does not insure your entire debt, but a portion of it that is hopefully large enough to cover the lender's costs in the event of default.

Why do they need it?

Foreclosure proceedings are expensive for the lender. They involve attorneys and a mountain of paperwork. Then, once the foreclosure is complete, the lender has to re-sell the property.

Re-selling often involves cleaning, making repairs to the property, another mountain of paperwork, commission fees to a Realtor, staff members to work with the Realtors, and the expense of holding it in inventory and maintaining it until it is sold. In cold climates this means winterizing, keeping heat on, and snow removal. In summer it means lawn care.

Were it not for PMI, lenders probably would not offer 90% or 100% financing at all. It would simply be too risky. So, pay it gladly in order to own a home, but do take the first opportunity to eliminate it!

Don't confuse PMI with property insurance

While lenders will certainly add their own property insurance to a property if you fail to do so, that is an entirely different kind of policy. PMI covers only the mortgage.

Just as a reminder: One of the other costs of obtaining a mortgage will be property insurance, and you will be required to bring a binder to closing. If you later remove that insurance, the lender will add their own, much more expensive property insurance - and it will cover only their interest, not yours. Be sure to keep your home insured!