What Is "Mortgage Insurance?"
- Private mortgage insurance protects banks and other lenders from people who might default on a mortgage loan. This form of insurance is usually required if you borrow more than 80 percent of your new home's value. Mortgage protection insurance is an optional policy you can acquire as a homeowner to pay off your mortgage in the event of your death or disability, protecting your family's ability to stay in the home. It is much like life insurance, but the benefits apply solely to your mortgage.
- Private mortgage insurance is usually part of a real estate deal in which the buyer pays less than 20 percent as a down payment. The mortgage insurance payments are included in the monthly mortgage that covers the loan amount and interest, plus you may need to pay the first year's premium up front. Purchasing PMI may be the only way to buy a home if you do not have much cash for a large down payment.
- Most PMI insurance becomes unnecessary after you have repaid enough of the loan that you owe 80 percent or less of your home's value. This value may be determined by the original purchase price or the current assessed value, depending on the contract. Due to the Homeowner's Protection Act of 1998, the lender and borrower are both responsible for ensuring this coverage is canceled, and in many cases the coverage must be canceled automatically if you owe 78 percent or less of your home's value.
- As of 2010, the official maximum rates for FHA mortgage insurance raised from 0.5 to 1.5 percent of the loan value for loans with at least 5 percent down payment, and 0.05 percent higher for loans with smaller down payments. This applies to the annual premium cost. Borrowers who pay for the mortgage insurance up front receive a discount. For non-FHA loans, the PMI cost is usually between 0.5 and 1 percent of the loan value annually.
- Homeowners may view the expense of private mortgage insurance as unfair, because it does not have a clear benefit to the homeowner. However, home buyers without money for a 20 percent or greater down payment might not otherwise be able to purchase a house at all. The Homeowner's Protection Act of 1998 was one step toward ensuring fairness in PMI for homeowners. Legislation enacted in 2007 allows you to deduct PMI premiums from your taxes, adding greater benefits for homeowners.
