Low down payment mortgages are somewhat risky for lenders because people are more likely to default on a loan in which they have very little money invested. If a default occurs, the lender must sell the home and pay foreclosure costs out of the proceeds, before applying any money to the loan balance. Lenders often lose money on foreclosures.

Lenders generally require us to purchase private mortgage insurance (PMI) if you are borrowing more than 80 percent of the value of the home you are purchasing (i.e., your down payment is less than 20 percent). PMI guarantees your lender will be paid if you default on your mortgage. PMI does not protect you against losing your house in the event of a default, however. Moreover, the insurance company may be able to seek recourse against you for any default claim they pay to your lender.

How much does PMI cost?
The cost of PMI depends on several factors, such as the amount of your down payment, the type of mortgage you take, and whether you pay premiums on a monthly basis or in a lump sum at closing. PMI premiums can commonly increase your monthly housing cost, but without it, you may be unable to qualify for a mortgage.

Can you cancel your PMI coverage?
PMI protects the lender, not the borrower. Thus, lenders generally want to keep PMI coverage on your loan for as long as possible. Of course, since you pay the premium, you will want to cancel the policy as soon as you are able. Before taking a mortgage, ask your lender about PMI cancellation policies. Some lenders will not allow PMI coverage to terminate during the life of the loan, while others simply require an appraisal showing you have 20 percent equity in the home and a clean payment history. Equity can be built in several ways. Your equity increases when the principal balance on your mortgage decreases, and also when the value of your home increases (because of improvements to the home or fluctuation in market value of homes in your area). If your lender states that your policy can be canceled once you reach a certain equity level, get written confirmation.

Are there any mortgage types which do not require PMI?
Some mortgages (such as FHA loans and VA loans) are insured by the government. Although a low down payment is usually acceptable on these mortgages, PMI may not be required.

Is there any way you can avoid paying PMI?
If you don't have at least 20 percent for a down payment, there may be an alternative to paying PMI premiums. Consider asking if your lender is willing to increase your mortgage interest rate a quarter of a point, rather than require PMI coverage. Your monthly payment will increase by roughly the same amount as the monthly insurance premium. However, mortgage interest is tax-deductible, whereas PMI payments are not.

Learn More...

Overview | Understanding The Basics | Types Of Insurance | Coverage Amounts
Choosing A Policy | Filing A Claim | Other Types Of Insurance | Home Safety Tips
Planning Concerns | Home Glossary

Please Note: The information contained in this Web site is provided solely as a source of general  information and resource.  It is a not a statement of contract and coverage may not apply in all areas or circumstances.  For a complete description of coverages, always read the insurance policy, including all endorsements.