There are different types of mortgage insurance. Private Mortgage Insurance (PMI) is insurance that protects the lender – the mortgage company. Many home buyers cannot afford the traditional 20% down payment on a home. They can make SOME down payments, but they do not have and cannot get the money to make a 20% down payment. With a down payment of less than 20%, the lender is taking a higher risk. PMI is your guarantee that you will not lose money. The buyer pays the monthly PMI premiums.
The Federal Housing Administration (FHA) and the Veterans Administration (VA) are government entities that guarantee mortgages. Borrowers must meet certain requirements to qualify for an FHA or VA guaranteed loan.
Basically, mortgage insurance works like this. Suppose you want to buy a house that sells for $ 264,000; that was the median home price in the US in October 2007. A 20% down payment would be $ 52,000. Not many people can get that much cash at the same time. If you can make a down payment of, say, $ 15,000, a private mortgage insurance policy will be issued to secure the balance of the usual down payment and the premiums will be added to the monthly payment.
Many people do not realize that the PMI policy can be canceled after the mortgage has been reduced and / or the value of the home has appreciated.
In the past, buyers were not informed that mortgage insurance could be canceled when the loan-to-value ratio declined to a certain point, usually 78%. The Homeowner Protection Act of 1998 made it mandatory for businesses to inform buyers each year of the terms and status of their mortgage insurance and give them the option to cancel when no longer required by law.