There are different kinds of mortgage insurance. Private Mortgage Insurance (PMI) is insurance that protects the lender - the mortgage company. Many home buyers cannot afford to make the traditional 20% down payment on a home. They can make SOME down payment, but they don't have and can't get the money necessary to make a 20% down payment. With less than a 20% down payment, the lender is taking a larger risk. PMI is their guarantee that they won't lose money. The buyer pays the monthly premiums for PMI.
The Federal Housing Administration (FHA) and the Veterans Administration (VA) are both governmental entities that guarantee mortgages. Borrowers must meet certain requirements in order to qualify for an FHA or VA guaranteed loan.
Basically, mortgage insurance works like this. Let's say that you want to buy a home that sells for $264,000 - that was the average price of a home in the U.S. in October 2007. A 20% down payment would be $52,000. Not many people can come up with that much cash all at one time. If you can make a down payment of, say, $15,000, a private mortgage insurance policy will be written to insure the balance of the usual down payment, and the premiums will be added to the monthly payment.
Many people do not realize that the PMI policy can be canceled after the mortgage has been reduced and/or the home has appreciated in value.
In the past, buyers were not informed that mortgage insurance could be canceled when the loan-to-value ratio decreased to a certain point - usually 78%. The Homeowner's Protection Act of 1998 made it mandatory for companies to inform buyers each year about the terms and status of their mortgage insurance and give them the option to cancel when it was no longer required by law.
Milos Pesic is a mortgage agent and owner of a highly popular and comprehensive Loans and Mortgages informational web site. For more articles and resources on different types of mortgages and loans, mortgage refinancing, mortgage lenders and brokers and much more, visit his site at:
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Hello Milos,
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Hi guys! The idea behind this kind of insurance is simple. You do not need to save money in order to buy a new house. You can get a real estate property paying only a minimum deposit or no deposit at all. For Lenders Mortgage Insurance click here.
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