Why you may need private mortgage insurance when buying a home

September 7, 2011 – Private mortgage insurance (PMI) is required for most for conventional mortgage loans when a borrower makes less than a 20% down payment during a home purchase.

This is also true for refinance transactions, if the equity in the property isn’t at least 20 percent.

Lenders require PMI on most conventional mortgages because it protects them against possible loss should the borrower default on their mortgage payments. The less money a borrower has invested in a home, the greater the probability of default.

Aside from conventional mortgages, FHA mortgages have their own form of protection known as a mortgage insurance premium (MIP). While the homeowner can usually cancel PMI once he or she has reached 20 percent equity in the house, with FHA mortgages, the MIP lasts for the life of the loan. A borrower would have to refinance to remove it.

Unfortunately, some borrowers continue to confuse private mortgage insurance with mortgage life insurance. Private mortgage insurance puts people in homes; mortgage life insurance pays all or a portion of your mortgage in the event of a homeowner’s death. Consumers who understand this difference realize how PMI enhances their ability to buy a home without having to save a large down payment first.

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