PMI is a widely misunderstood concept. By definition, Private Mortgage Insurance (PMI) is coverage that insures the lender in the event that the underlying loan goes into default (foreclosure). PMI is required on most conventional loans where the homeowner has less than 20% equity in the subject property. All FHA loans require Monthly Mortgage Insurance (MMI) premiums paid by the borrower and also an Upfront Mortgage Insurance Premium (UFMIP) which is paid at closing. VA loans require the payment of what’s known as the VA funding Fee which is VA’s mortgage insurance pool, although VA loans do not require a monthly mortgage insurance premium.

So PMI just benefits the lender? Yes and No. Over the years lenders have found that in a foreclosure sale a property will likely sell for only 80% of what they thought the market value was at the time of the loan (even less in today’s world). Due to this all mortgage lenders would require a 20% down payment or they would not make the loan. So, every home buyer would have to come up with a 20% down payment. This would make it very difficult for virtually everyone to buy their first house. Here comes PMI to save the day! The PMI insures the lender for the portion of the loan that exceeds 80% of the value of the house, so, this makes it possible for home buyers to make as little as a 3.5% down payment to purchase a home.

The PMI premiums are pooled and then any losses are paid out of the pool and lenders are protected by the insurance and can make loans that don’t require as big of a down payment. This allows a lot more people to become home owners. The bottom line is that without PMI you would have to put 20% down to buy that house and it could take years for you to save the money to do that. So, if you are paying PMI, be glad it was available because the benefit to you is that you got a loan with a much smaller down payment as a result of being able to get Private Mortgage Insurance!

Written By:
Ken Mascia
PrimeCapitalMortgage.com
248.644.1200

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