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Understanding Private Mortgage Insurance

By Tiffany Raiford

Definition of Private Mortgage Insurance

Private mortgage insurance is a type of mortgage insurance required by most lenders in specific situations. For example, if you are looking to buy a home and you cannot put down at least 20 percent of the asking price of the home as a down payment, your lender will require that you acquire this type of private mortgage insurance. Its job is to protect the lender who is funding your home on your behalf. The purpose is to protect your lender should you default on your mortgage payments and/or enter into foreclosure.

Who Pays for Private Mortgage Insurance

The simple answer is that you, the buyer, pay for private mortgage insurance. If you can't afford the standard down payment, the insurance goes to you to pay. The rates vary greatly based on several factors. For example, whether or not you receive private or government mortgage insurance, current rates and how much you borrow from your lender to finance your home. The amount is based on the amount you borrowed and the rate at which you borrow. The amount is then calculated to come up with the annual cost of your private mortgage insurance and then divided by 12 and added to your monthly mortgage payment.

Private Mortgage Insurance Ends

It's important for you to know not only what you're paying for each month, but also when it should stop. You don't pay private mortgage insurance over the life of your mortgage. In fact, you only pay it until the loan to value ratio is 80 percent or less. You might have to notify your lender that the payments should be discontinued as you might end up paying it longer than necessary. Lenders are required by federal law to discontinue this payment when your loan balance reaches 78 percent, but it's important that you keep track on your own.

Private mortgage insurance is not something you'll need to learn anything about if you're putting 20 percent down when you buy your next home. However, if you're not putting that 20 percent down, you'll need to know what this is, how it works and why you're paying this fee.

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