Buying your first home can be daunting if you aren’t equipped with the right terms, so today we’re going to introduce to you one of the most widely used terms; Mortgage Insurance or Private Mortgage insurance (MI or PMI)
If your down payment on a home is less than 20 percent of the appraised value or sale price, you need to obtain mortgage insurance.
Mortgage insurance is sometimes referred to as private mortgage insurance, or PMI, in order to differentiate it from FHA and VA insurance types, which are run as government programs. The price of mortgage insurance varies depending on the size of the down payment and the loan, but it typically amounts to nearly 1/2 of 1% of the loan.
When dealing with mortgage insurance the borrower pays the premiums, but the lender is the beneficiary. The coverage protects lenders against the borrower’s default. If a borrower defaults on a mortgage, the insurance company ensures that the lender will be paid in full. Mortgage companies choose insurance providers for their customers, but the borrowers have to pay the bill. Usually, they do so in monthly installments as part of the monthly mortgage payment. But some lenders offer programs whereby the borrower pays the entire insurance premium in a lump sum at closing. This is called “Upfront PMI”.