Private Mortgage Insurance (PMI) can help you purchase a home you might not be able to afford without it. There are however, many misconceptions about Private Mortgage insurance and what it does. The biggest misconception is that it protects you, the homeowner. This is absolutely false; mortgage insurance does nothing for you but take your money each month. Mortgage insurance protects the lender, not the borrower and, the borrower pays for it.
Private Mortgage insurance primarily protects lenders from default; however it does allow potential homeowner the opportunity to finance with smaller deposits without relying on high interest loans. This insurance is usually necessary when a potential homebuyer borrows more than 80 percent of a property’s value. This insurance protects the lender from the borrower not being able to repay the mortgage loan. The mortgage insurance will compensate the lender for any losses they incur when a property goes to foreclosure. The cost of mortgage insurance can range between 1 to 2.5 percent of the loan value. For many paying mortgage insurance is a better option than saving for years on a down payment.
Private Mortgage insurance enables people to enter the housing market quickly while not paying high interest rates. Many homeowners that Refinance Mortgage loans within one or two years could also be entitled to reimbursement of their initial PMI premiums.