If you’re currently shopping for a mortgage and the term PMI has come up, but you’re not familiar with what it is or why it applies to your loan, we’ll be happy to fill you in. But first, let’s offer a simple definition of PMI:
Yes, you read that right: PMI doesn’t protect you the borrower, it protects the lender against loss in case you stop making your payments and the lender is forced to foreclose.
PMI may not sound like a great deal at first glance, but there are actually a lot of benefits to mortgage insurance. The biggest benefit is that it enables more people to get mortgage financing with lower rates and costs.
Why Mortgage Insurance?
Years ago, mortgage lenders considered it too risky to lend more than 80% of the value of a home, which meant that home buyers could only purchase a home with minimum 20% down. As home values rose over time, that 20% became an increasingly formidable sum of money to save up, so it became harder for many people to become homeowners.
Mortgage insurance was created to make it possible for home buyers to make smaller down payments, keep rates and fees lower, and satisfy the lenders’ needs to keep risk reasonable.
Two Major Types of Mortgage Insurance
Today, the two main types of mortgage financing are conventional and FHA. Therefore, the two main types of mortgage insurance in the home loan marketplace are FHA mortgage insurance, and Conventional PMI.
The term PMI more accurately refers just to mortgage insurance for conventional loans, but it’s often used to refer to FHA mortgage insurance as well. Check out the following for more specific information about both types of mortgage insurance.
FHA mortgages have not one, but two different types of mortgage insurance. Get the scoop on how FHA mortgage insurance works, how much it will cost, and when you can get rid of it.
Conventional PMI is a little more straightforward than FHA mortgage insurance. Find out how it works, when it applies, and how soon you can cancel it from your mortgage.