Have you ever heard the term “private mortgage insurance” (PMI) but weren’t quite sure what it was? If so, you’re not alone. PMI is a common expense for homebuyers in the United States, and yet many people have no idea what it is or how it works. In this blog post, we’ll provide an overview of private mortgage insurance and explain why you may need to pay for it when buying a home. 

What is Private Mortgage Insurance? 

Private mortgage insurance (PMI) is an insurance policy that protects the lender if a borrower defaults on their loan. It’s usually required for borrowers who make a down payment of less than 20% of the purchase price of their home. The cost of PMI varies depending on factors such as credit score, loan type, loan-to-value ratio, and debt-to-income ratio. 

How Does Private Mortgage Insurance Work? 

When you take out a loan with less than 20% down payment, your lender will require you to purchase private mortgage insurance in order to protect them in case you default on your loan. The PMI company then pays out money to cover any losses incurred by the lender if you default on the loan. This means that lenders are more likely to approve loans with low down payments because they know they are protected by PMI if the borrower fails to make their payments. 

Why Do I Need Private Mortgage Insurance? 

The main reason why lenders require private mortgage insurance is because they want to protect themselves from potential losses caused by borrowers who can’t afford to repay their loans due to financial difficulties or job loss. By requiring PMI, lenders can be assured that even if a borrower defaults on their loan, they will still be able to recoup some of their losses from the insurer rather than having to bear all the costs themselves. 

Why Should I Use PMI?

Using PMI allows you to put down a smaller downpayment and keep more money in your pocket. Instead of investing the full 20% downpayment into your home you can:

  • Pay off debts with a high interest rate
  • Direct funds to investments 
  • Use money to fix up your new home, increasing its value
  • Put the money aside to save for a rainy day

Private mortgage insurance (PMI) is an insurance policy that protects lenders against losses due to borrower default on mortgages with small down payments. While PMI can increase your monthly costs significantly when buying a house, it can also give lenders more confidence in approving loans with lower down payments since they know they are protected from potential losses should borrowers fail to make their payments in full or at all. Ultimately, understanding how PMI works and why it might be necessary for certain types of mortgages can help homeowners avoid costly and unnecessary fees.

About PMI Rate Pro: PMI Rate Pro is a cutting-edge technology company hyper-focused on PMI. Our Pricing Engine delivers prices from all 6 MI providers across 5 standard insurance products, all with a single click of a button. The quotes can be displayed in order by best price, or in order based on our risk allocation algorithm. PMI Rate Pro has two products: MIQuote – Web application that quotes PMI and MIPrice- API product that is a pricing engine.