What Is Private Mortgage Insurance?

Many people, when purchasing their first home, do not have the 20% downpayment necessary to complete the sale. This 20% is necessary for the lender because it shows that the buyer has skin in the game and will not back out of their loan without losing a good deal of money. It is difficult for a first time home buyer because the buyer has not had a chance to build up equity in a previous home that they could then use for a downpayment in their next one. This is where Private Mortgage Insurance (PMI) comes into play.

Over 60 years ago, in 1957, the Mortgage Guaranty Insurance Corporation was founded as the first PMI company ever. It was the first competition available to the FHA market and allowed a new group of buyers to enter the housing market. This mortgage insurance allows the lender to underwrite loans even when the purchaser does not have the downpayment necessary. The PMI company uses these insurance payments to guarantee that the lender will not lose money on the sale and will pay the 20% downpayment if the buyer backs out.

The good thing about PMI is that it can be a temporary solution for the buyer while still allowing them to get into the home that they wanted. The buyer has the opportunity, as their home’s value rises along with the equity of the home, to refinance out of the PMI they initially purchased. Many lenders, once the 20% threshold is reached, will allow PMI to be taken out either through a refinance or sometimes even with a simple letter request. When this happens, the lender maintains the loan and the monthly payment for the purchaser decreases because PMI goes away.

While it is a fairly large monthly expense, without PMI there would be a lot more people renting houses and apartments. This monthly expense allows otherwise unqualified buyers to get into a home that they want and build equity rather than renting a home that builds equity for someone else. While it is not a perfect system because many people still default on their loans, it has worked for over 60 years and it has allowed more people to purchase homes that help them financially for the rest of their lives.

This article was originally published on JasonCohenPittsburgh.org

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