Private Mortgage Insurance

When Does Private Mortgage Insurance Benefit You?

Private mortgage insurance is often confused with mortgage life insurance, but the two are vastly different. You may be required to provide both mortgage life insurance and private mortgage insurance to take out a loan for your house, though private mortgage insurance is less often required than mortgage life.

Private mortgage insurance is a way for the lender to further protect his interest when lending you money for the purchase of a home. If you take out a private mortgage policy and then default on the loan, a private mortgage insurance policy will pay the lender the amount specified on the policy. You may wonder why the lender needs additional assurance of your ability and willingness to pay off the loan. After all, if you should default on the loan, the lender will repossess your house and sell it, putting the proceeds toward the amount you owe. That's true, but there are some very specific circumstances in which private mortgage insurance is required.

The most common situation that requires a borrower to take out a private mortgage insurance policy is when the borrower isn't able to provide a significant downpayment. Consider the scenario in which the bank may have to repossess a home because of a defaulted loan. When that happens, the bank is counting on being able to sell that home for at least enough to cover the loan and the expenses incurred during the repossession and sale of the property. If the borrower has put nothing down and the loan is for the full market value of the home, the bank may have to sell the property at a loss. Even if they get full market value, it may not be enough to cover the expenses they've incurred during the repossession and sale. If a borrower has a private mortgage insurance policy, that policy will pay off at the time of the default, meaning the lender is not likely to lose any money on the repossession.

Typically, the borrower will pay for the private mortgage insurance only for a specific amount of time - usually until the loan reaches a certain payoff point (when the amount owed is at or below 80 percent of the market value of the home, for example). The rules governing this depend on the lender and the state where the transaction takes place. Your lender will be able to give you more specific details.