Understanding Private Mortgage Insurance

This is the eighth in a series of videos and articles inspired by Mars Bank’s First Time Homebuyer live events. Sign up today for our free online first time homebuyer seminar

You may be asking what is Private Mortgage Insurance (or PMI), and why do I need it? Sometimes it is referred to as mortgage insurance or MI. It is an insurance policy that the borrower pays for, along with their mortgage, when they’re putting less than 20 percent in down payment. Different Insurance Private mortgage insurance is not homeowner’s insurance or government mortgage insurance.

  • Homeowners’ insurance is covers damage to the home such as fire, theft, or water damage.
  • Government mortgage insurance is required when a Federal Housing Administration (FHA) mortgage loan is used to purchase a home.

The Importance of PMI The private mortgage insurance policy protects the lender in the event of a default by the borrower. It lowers the bank’s risk by lowering its exposure to the loss if the mortgage is not repaid. The benefit to the borrower is that it creates flexibility creating the possibility to buy when a 20% down payment is not made. This could mean a buyer can purchase sooner, buy a bigger (more expensive) home, or that the borrower can hold money out of the down payment to have funds to purchase other needed items such as furniture, appliances, or a home improvement. For these reason, PMI is a win-win situation. How PMI Works The monthly PMI premium payments will be made and escrowed in with your regular payments of principal, interest, taxes, and (homeowners) insurance. Once your mortgage loan principal is reduced to less than 80 percent of the original appraised value, the PMI can be canceled. When PMI is canceled, the monthly payment is lowered by the PMI premium amount. If you’re interested in purchasing your first home or have questions about PMI, contact Mars Bank today. We have representatives ready to help you start your new home search.  

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