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Private Mortgage Insurance - What is it and Will You Need it?

Posted by  on Aug 02, 2010
 
In the market today there are many ways to help protect lenders and borrowers. Because borrowers are more likely to default on their loans than lenders, Private Mortgage Insurance has become a popular way to keep from defaulting on a loan. This helps reduce the number of lenders that have to raise there rates in order to recover their losses, ultimately keeping the mortgage industry flowing smoothly. Often nowadays lenders require this as a way to ensure the payment of the mortgage.

What is Private Mortgage Insurance?

Private Mortgage Insurance is insurance coverage that ensures the lender that he will be paid in full for the amount borrowed. This comes at a cost to the borrower, and can range anywhere from .20% to .90% of the loan and will need to be paid for a specified amount of time. Often it is used when the borrower cannot make a down payment of 20%.

Private Mortgage insurance allows lenders to recover any losses if a borrower defaults on their loan. Although this is great for lenders, the borrower often has to pay the insurance for much longer than is necessary amassing to a large amount of money being paid to a company for no reason.

The terms often vary but in essence the borrower pays the insurance monthly until the initial down payment they did not have is paid off. After this the borrower goes on paying the loan like normal. The problem comes that nowadays many private mortgage insurance companies charge people for a certain time period regardless of how close they are to paying off their initial down payment, leading to very high costs to the borrower.

Although the borrower has the option to cancel Private Mortgage Insurance the process can be difficult and often they will not be able to get out of the agreed upon terms.

Do You Need Private Mortgage Insurance?

If you are unable to pay the initial down payment of 20% then most likely you will be required to pay for Private Mortgage Insurance. Private Mortgage Insurance will allow you to get a loan without a down payment but will add up to much higher losses on the investment of the house over the course of a couple of years.

In order to avoid this you can save up money in order to pay the down payment or you can try to take out a loan that covers the down payment as well. The downside to this involves having to pay two loans at once in order to repay what is owed.

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