Private mortgage insurance (PMI) is a type of insurance policy paid for by borrowers of certain types of mortgages to protect a lender. The policy is designed to protect the lender in case a borrower defaults on his or her loan. This type of insurance is usually required if a borrower puts down a downpayment amount of less than 20% of the total home value. The additional insurance protects the lender if the borrower defaults on the mortgage loan.
A common example of PMI is in home mortgages. The insurance is often required when a borrower has less than 20% equity in their home. As such, the policy kicks in to protect the lender from losses in case the borrower fails to make their mortgage payments. Without this added protection, lenders would be unable to assume much risk when providing mortgages.
One of the benefits of PMI is that it allows those with limited equity the opportunity to purchase a home. Without this added protection, lenders would be more likely to reject applications due to the lack of collateral. In addition, borrowers that choose to pay for PMI may be able to get better and lower rates for their mortgages.
It’s important to understand that PMI does not cover any damage to the real estate used as collateral. It also does not cover any defaults on other debts that the borrower might have. The only purpose of PMI is to help protect a lender from losses in case a borrower defaults on their mortgage loan.
Overall, PMI is an important product for lenders and borrowers alike that helps protect the lender from risks associated with a borrower’s loan agreement. If you’re in the market for a mortgage, it’s important to be aware of your equity level and the requirements lenders may have for private mortgage insurance.