What You Need to Know About Private Mortgage Insurance

Did you know that you could be required by a lender to have private mortgage insurance (PMI) as part of the terms of your home loan? Private mortgage insurance can raise a homeowner's monthly payments. Read this article to learn the details about private mortgage insurance.

Bankers are in the business of making loans. They have thought of many creative tools to provide the loans to borrowers who come from all types of financial background. Private mortgage insurance is a tool used by bankers to help them write more loans.

When a homebuyer can not afford the standard 20 percent down payment, the lender often will require PMI, or private mortgage insurance, to help defuse some of the risk on the loan. Since the lender is financing such a huge percentage of the house, they want to guard against a potential default. For the borrower this means higher monthly payments. According to the Mortgage Bankers Association (mortgagebankers.org), PMI usually costs about one-half of one percent of your loan balance.

PMI dose not last forever. According to real estate commentator Jack Guttentag (mtgprofessor.com), a federal law passed in 1999 says private mortgage insurance must be canceled when the loan balance is payed down to 78 percent of the total. Guttentag says this usually can be accomplished in five years from your first payment.