Real estate business is a highly specialized field that has its own set of terminologies. People who are not interested in purchasing or selling properties may not be aware of the terminology. One such term is private mortgage insurance (PMI). This insurance provides protection to the lender against non-payment in case the borrower defaults on a home loan.

How does PMI help lenders?

The main benefactor of private mortgage insurance is the lender. Borrowers have to purchase PMI when they are unable to make the required down payment. A borrower does not get the freedom to shop around and purchase this insurance. It is their lenders who will choose the insurance provider for the borrower. PMI enable lenders to offer home loans even with low down payments as it protects them against loss in case borrowers default on the mortgages. Though the lender becomes the beneficiary, the borrowers pay the premiums.

How does PMI help borrowers?

To purchase a house with a conventional home loan, borrowers will have to put down 20% of the purchase price of the property. If they do not have sufficient funds to make the required down payment, they can still purchase the house by obtaining private mortgage insurance. So, with the help of PMI, borrowers do not have to wait for years to accumulate the required down payment for fulfilling their dreams.

How much does PMI cost?

The cost of private mortgage insurance depends on the size of the home loan and the amount that borrower make as down payment. Typically, the cost of the insurance is about half of 1% of the home loan. Borrowers generally have to be pay the premiums on a monthly basis, included in the home loan payment. Private mortgage insurance is very lucrative for lenders and so they are often reluctant to end it on time. Hence, the Homeowners Protection Act (HPA) of 1998 was enacted to automatically terminate PMI when borrowers attain 22 % home equity and also gives the right to borrowers to request lenders for its cancellation when they reach 20% equity in home.