What is private mortgage insurance and how does it work?

Private mortgage insurance, often referred to as PMI, is a type of insurance that protects the lender in the event that the borrower defaults on their loan. It is typically required when a borrower makes a down payment that is less than twenty percent of the home’s purchase price. The rationale behind this requirement is that a lower down payment indicates a higher risk for the lender, as the borrower has less equity in the home. PMI can be structured in a few different ways. Borrowers may pay PMI as a monthly premium added to their mortgage payment, as a one-time upfront premium at the time of closing, or sometimes as a combination of both. The cost of PMI typically ranges from 0.3 percent to 1.5 percent of the original loan amount annually, depending on various factors such as credit score and loan-to-value ratio. Once the borrower’s equity in the home reaches twenty percent, they may be able to cancel the PMI, provided they meet certain requirements set forth by the lender. It is beneficial for borrowers to regularly monitor their equity position and to inquire with their lender about the possibility of canceling the insurance when it is no longer necessary. For more detailed information on PMI, it may be useful to consult the official National City Mortgage website.