Private mortgage insurance is an insurance product that is designed to protect lenders against loss should a borrower default on their mortgage. Many lenders require private mortgage insurance when the loan-to-value ratio isn’t high enough. Here is what you need to know about private mortgage insurance, especially if your lender has told you you need to get it.
What it Is
Private mortgage insurance is an insurance policy payable to the lender should the borrower default on a mortgage loan. It is insurance that is designed to offset potential losses in a case where the lender is not able to recover its costs after the sale of a foreclosed property.
The point of this type of insurance policy is to protect the lender, but at the same time allow borrowers who may be deemed “more risky” the opportunity to buy a home.
How It Works
Private mortgage insurance starts out with you applying for a loan. If the amount that you want to borrow exceeds 80% of the value of the home (essentially, you’re not putting 20% down) the lender may require you to pay for private mortgage insurance. The lender will quote you the price of their insurance company to issue private mortgage insurance, or will give you the option to shop around.
Once you select a private mortgage insurance company, you can either choose to have the insurance payable up front, or have it capitalized onto the loan. Other policies require monthly or annual private mortgage insurance payments.
Legally, your lender can require you to provide private mortgage insurance until the loan has amortized to a 78% loan-to-value ratio based on the original purchase price. However, the cancellation request must come from the servicer of the mortgage, and often a new appraisal will be required to determine the loan to value ratio.
Advantages
The biggest advantage of getting private mortgage insurance is that it enables borrowers who cannot put 20% down to possibly qualify for homeownership. Since the private mortgage insurance provides security to the lender, you may be able to qualify for different mortgage products that you wouldn’t normally be able to get. This is also helpful for borrowers who don’t qualify for programs like FHA or VA loans, which do allow for lower down payments but have other restrictions on the borrower.
Disadvantages
There are, however, a lot of disadvantages to getting private mortgage insurance. The biggest is that you cannot get rid of the policy until the loan-to-value ratio is less than 78% based on current market value. In the current housing market, with declining home values, you may be forced to pay for the policy for a longer time that you originally intended.
Another disadvantage is that the cost of private mortgage insurance is not tax deductible, and so there may be better options rather than getting insurance. For example, you could get a second mortgage on the property, which would be tax deductible, rather than paying for private mortgage insurance.
