What is Private Mortgage insurance?
Mortgage Insurance insures lenders in the event of a borrower’s foreclosure. It is paid for by the borrower, and allows lenders to grant loans that they otherwise would not consider. Depending on credit scores and loan structure, mortgage insurance may be required when the down payment is less than 20%.
Private Mortgage Insurance, or PMI, is insurance purchased by the buyer to protect the lender in case the buyer defaults on the home loan. PMI is generally applied when you put down less than 20% of the home’s purchase price. The reason is this: With 20% down, you are considered a low risk. Even if you default the lender will probably come out ahead because they’ve only loaned 80% of the home’s value and they can probably recoup at least that amount when they sell the foreclosed property. But with 5% or 10% down, the lender has a lot more invested in the home loan and if you default, they will almost surely lose money. This is why lenders require buyers to purchase PMI if they put down less than 20%. It’s insurance that, no matter what happens, the lender will recoup its investment.
