Insurance
PMI - Private Mortgage Insurance
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3 of 5 Insurance
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Not to be confused with mortgage life insurance, sometimes called
credit life insurance (a type of policy which repays an outstanding
mortgage balance upon the death of a person), Private Mortgage
Insurance (PMI) is designed to protect the mortgage
company against losses as a result of foreclosure.
Simply put, mortgage insurance protects the mortgage company
against financial loss if a homeowner stops making mortgage
payments. Mortgage companies usually require insurance on low down
payment loans for protection in the event that the homeowner fails
to make his or her payments. When a homeowner fails to make the
mortgage payments, a default occurs and the home goes into
foreclosure. Both the homeowner and the mortgage insurer lose in a
foreclosure. The homeowner loses the house and all of the money put
into it. The mortgage insurer will then have to pay the mortgage
company's claim on the defaulted loan.
This protection serves a dual purpose in that it allows the
homebuyer to qualify for lower down payments than would otherwise be
allowed and enabling mortgage companies to grant loans that would
otherwise be considered too risky to be purchased by third party
investors like the Federal National Mortgage Association (FNMA) and
the Federal Home Loan Mortgage Corporation (FHLMC).
Private mortgage insurance is paid on an annual, monthly or
single premium plan. Premiums are based on the amount and terms of
the mortgage and vary according to loan-to-value ratio, type of
loan, and amount of coverage required by the mortgage company.
Annual Plans require
an initial one-year premium collected at closing. Subsequent monthly
payments are collected along with the mortgage payment each month
thereafter.
Monthly Plans allow a
borrower to pay only 1 or 2 months’ premiums at closing, followed
by monthly payments which accompany the regular monthly mortgage
payment.
Under Single Premium Plans,
the entire premium covering several years is paid as a lump sum at
closing. Typically, homebuyers choose to add mortgage insurance
premiums to the loan amount, thus reducing their closing costs and
increasing their deductible interest.
Mortgage Insurance is cancelable once homeowners have at least 20
percent equity in the property. Borrowers should contact their
servicer who will then usually require an appraisal on the property.
FHA is a good choice for some borrowers with credit history
problems that might need special assistance.
Unlike Private Mortgage Insurance, which is cancelable in
most cases, FHA insurance lasts for the life of the loan.
FHA insurance is a government-administered mortgage insurance
program that does have certain restrictions. FHA has maximum
regional loan limits that are lower than those of PMI. Compared to
FHA insurance, PMI is less expensive, takes less time to be
approved, and offers more payment plans.
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