Mortgage Insurance, often known as Private Mortgage Insurance (PMI), is a policy required for borrowers who make a down payment of less than 20% on a conventional mortgage loan. This insurance protects the lender if the borrower defaults on the loan. Essentially, it acts as a safeguard for lenders against the increased risk associated with lower down payment loans.
The inclusion of Mortgage Insurance allows mortgage lenders to offer loans to borrowers who might not have a substantial down payment but are otherwise qualified. For the borrower, while PMI doesn’t offer direct financial protection, it enables them to access homeownership with a smaller down payment.
Typically, homeowners pay a percentage of their mortgage value annually as PMI. If they fail to make mortgage payments, the insurance company compensates the lender. However, this additional cost can increase the overall expense of owning a home.
It’s important to note that you can cancel PMI when:
This cancellation is subject to certain lender-specific rules and requires a history of timely payments.
For FHA loans, borrower requires a Mortgage Insurance Premium (MIP) regardless of the down payment. The rules for maintaining MIP depend on the loan-to-value ratio at the time of loan issuance and can extend for the mortgage’s life or up to 11 years.
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