Private Mortgage Insurance

If you want to get a home loan, you probably heard the “private mortgage insurance” phrased being used. In this article I’ll try to explain exactly what private mortgage insurance is and when will you need it.

Usually, a lender will ask you to get a private mortgage insurance in the case when the home loan’s value is more than 80% of the house’s purchase price.
From a lender’s point of view, the best borrower is the one that can fund 20% of the house’s price. For the borrower, this means that they have sufficient capacity to refund it. When they invest a lot of money in the house, they show that they are committed to that house and to the repayment of the loan.
More than that, in case a borrower will default on that loan, there will be enough equity on the house, which can be sold and the mortgage can be easily repaid based on its value. Also, when the loan is given to a borrower of this type, the risk is much smaller than if it was given to someone that didn’t have the equity behind them.

Still, that doesn’t mean that you will not receive a loan if the down payment is smaller than 20% of the loan’s value. In order for the risk to be reduced, they will ask you to buy a private mortgage insurance.

PMU, or private mortgage insurance, will give the bank enough security for the risk that they are taking when they give you a loan and the down payment is smaller than 20% of the value. If the borrower defaults on the loan, the insurance company pays the rest of the loan that remains. With a private mortgage insurance, the bank insures that they don’t lose any money, even if the borrower doesn’t pay the loan.