Private Mortgage Insurance (PMI) is default insurance on mortgage loans, provided by private insurance companies. PMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage.
The Homeowners Protection Act of 1998 requires PMI to be canceled when the amount owed reaches a certain level, particularly when the loan balance is 78 percent of the home’s purchase price. Often, PMI can be cancelled earlier by submitting a new appraisal showing that the loan balance is less than 80% of the home’s value due to appreciation (this generally requires two years of on-time payments first)
Different terms:
- Mortgagee’s Title Insurance is a policy that protects the lender from future claims to ownership of the mortgaged property. Generally required by the lender as a condition of making a mortgage. In the event of a successful ownership claim from someone other than the mortgagor, the insurance company compensates the lender for any consequent losses.
- Mortgagor’s Title Insurance is a policy protecting the buyer/ owner of real property from successful claims of ownership interest to the property. The coverage usually is supplemental to a Mortgagee’s Title Insurance policy, and the premium is customarily paid by the buyer.
Features of Private Mortgage Insurance:
- The PMI charges depend on the amount of down payment and loanto value ratio.
- The mortgage insurance premiums are tax-deductible.
- A part of the private mortgage insurance premium is paid at closing and the rest is included in the monthly mortgage payment.
- A borrower has to pay these insurance premiums until the home equity increases to 80% of the property value. But in case of mortgages insured by the Federal Housing Administration, the private mortgage insurance is to be paid throughout the loan term.
Benefits of Private Mortgage Insurance:
- Private mortgage insurance helps a borrower to take a mortgage with a down payment as low as 3% or 5%.
- It helps lenders from losses in case the borrower fails to make monthly payments on the mortgage.
