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The Role Of Private Mortgage Insurance When Securing A Home Loan

21 July 2023

Eva Kennedy

Do you not have enough money to make a significant down payment toward your home purchase? It is likely that the lender will require that you pay private mortgage insurance as part of your monthly payment. While it is not desirable to pay private mortgage insurance, it can make it possible to get the money that you need to purchase a home. Here are a few key things to know about private mortgage insurance if you're unaware of what it is.

What Is Private Mortgage Insurance?

The purpose of private mortgage insurance is to protect the lender if you were to default on your mortgage. Many lenders require PMI if your down payment is below a specific percentage of the home's purchase price, which is typically 20% or less. Since the lender has some security on their end if you cannot pay back the loan, they'll be more willing to lend money to a borrower that doesn't meet certain requirements and is more of a risk.

How Does Private Mortgage Insurance Make Home Ownership Accessible?

Unfortunately, many people do not have enough money saved up for a 20% down payment and are viewed as a higher risk than other borrowers. Simply charging a higher interest rate to borrowers is not enough, because lenders have determined that low down payments often result in borrowers defaulting on their mortgages. Without private mortgage insurance, a lender may not agree to let someone borrow a large sum of money for a home.

Private mortgage insurance gives the lender peace of mind that they will get their money back one way or another. While it is your responsibility to pay for private mortgage insurance, the alternative may be to not get a mortgage at all.

What Factors Influence The Cost Of Private Mortgage Insurance?

Private mortgage insurance is not a cost that is the same across the board for all loans. It can vary based on several factors about your particular mortgage. This includes your credit score, the loan amount, the loan-to-value ratio, and the size of your initial down payment. A lender will let you know how much private mortgage insurance will cost based on the unique factors about the home you want to buy.

Still have questions about private mortgage insurance? Reach out to your lender to determine how it will impact your mortgage and the steps you can take to get rid of it later on in the mortgage.

If you want to learn more about private real estate financing, talk to a local lender.

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