Private mortgage insurance (PMI) is insurance that protects a lender or investor against loss if a borrower stops making mortgage payments. It allows you to buy a house with a small down payment. Homeowners with less than 20 percent invested in a home are more likely to default, making low down payments mortgages more risky for lenders and investors. For this reason, lenders and investors generally require mortgage insurance for loans with down payments of less than 20 percent.
The Difference Between PMI and FHA Insurance
Private mortgage insurance is the private sector alternative to the Federal Housing Administration mortgage insurance, which is a government program backed by taxpayers.
PMI is not mortgage life insurance, which pays off a mortgage if you die or become disabled. It is not homeowners insurance, which protects you from loss from theft, fire or other disaster. Mortgage insurance protects the lender and investor from loss, not the borrower. PMI protects the lender, in case you default on your payments.
Conventional lenders are required by law to automatically cancel the PMI policy when you pay your loan down to 78 percent of your home's original purchase price or the appraised value. Some conventional lenders will even consider a new appraisal showing that the home's value has increased enough to render the loan balance 80 percent or less of its current value, and use that as the basis for removing PMI.
If your home loan meets the 78 percent standard on an FHA Loan you must also have been paying annual MIP for at least five years to have the MIP cancelled.
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