Private Mortgage Insurance

Private mortgage insurance (PMI) is a security blanket for the lender that will protect them if a borrower defaults and can’t pay their mortgage.

If you make a down payment that is less than 20 percent of your home's appraised price, you will probably need to purchase private mortgage insurance.

If you purchase PMI the amount you will need to pay usually differs depending on the down payment you were able to put down and the loan you were given. The payments are typically about half of 1 percent of your loan and are normally made either annually or monthly.

Many homeowners will need to purchase PMI because most houses these days are well over $150,000. Even for a home that is $150,000 the homebuyer would likely be required to make a down payment on their mortgage of $30,000, which is an exorbitant amount of money to most people.

One way to get around paying PMI is to accept a higher interest rate on your mortgage. The exact interest rate increase will depend on the down payment that you make.

If you do opt for PMI, you are only required to make payments on it until you have paid back 80 percent of the principle of your mortgage. Most lenders should give you an idea of how long it will take you to pay back 80 percent and they should cancel your PMI when you have paid back 78 percent.

Private mortgage insurance should not be confused with mortgage life insurance. Unlike PMI, mortgage life insurance is a type of insurance that pays all or a portion of your mortgage in the event of your untimely death.

Private mortgage insurance offers people with few assets the opportunity to stop renting and purchase property more quickly. Many young people who still earn relatively small incomes are being offered the opportunity to become homeowners with this sort of program.