PMI - Private Mortgage Insurance

PMI is Private Mortgage Insurance, also called Mortgage Insurance (MI). PMI is insurance, required by lenders, needed for a * mortgage loan with a low * down payment, usually a down payment less than 20 percent of the price of the home, or in a refinancing, when the amount financed is greater than 80 percent of the appraised value. PMI protects lenders from the risk of * default and * foreclosure. PMI is provided by a private mortgage insurance company, is usually paid by the borrower (you), and is included in the mortgage payment.

PMI allows prospective buyers who cannot, or choose not to, provide significant down payments to obtain mortgage financing at affordable rates. It is used extensively to facilitate high ratio loans, generally, loans in which the * loan to value (LTV) ratio exceeds 80 percent. With PMI, the lender can recover costs associated with the resale of foreclosed property, and accrued interest payments or fixed costs, such as taxes or insurance policies, paid prior to resale.

Excessive PMI coverage provides little extra protection for a lender and does not benefit the borrower. In some instances, homeowners have experienced problems in canceling PMI. At other times, lenders may have agreed to terminate coverage when the borrower's equity reached 20 percent, but the policies and procedures used for canceling or terminating PMI coverage varied widely among lenders.

Prior to the Homeowners Protection Act (HOPA), homeowners had limited recourse when lenders refused to cancel their PMI coverage. Even homeowners in the few states that had laws pertaining to PMI cancellation or termination noted difficulties in canceling or terminating their PMI policies.

HOPA now protects homeowners by prohibiting life of loan PMI coverage for borrower paid PMI products and establishing uniform procedures for the cancellation and termination of PMI policies.

Glossary For This Page
(In Alphabetical Order)

* Default
Failure to perform a legal obligation; a default includes failure to make the payments on a financial obligation, but may also be a failure to perform some action or service that is non monetary (not relating to money).

* Down payment
Paying a portion of the price of a home up front, usually between 3% to 20%, which is not borrowed.

* Foreclosure
A legal action that terminates (ends) all ownership rights in a home when the homebuyer fails to make the mortgage payments or is otherwise in default (not making the payments) under the terms of the mortgage.

* Loan to Value (LTV) Ratio
A percentage calculated by dividing the amount borrowed by either the purchase price or appraised value of the home, whichever is the lower of the two amounts. A 75,000 dollar loan on a property appraised at 100,000 dollars is a 75% loan to value ratio, example, 75,000 dollar loan amount divided by the 100,000 dollar price or appraised value. The higher the loan to value (LTV) ratio, the less cash a borrower is required to pay as a down payment, which puts lenders more at risk, also can carry a higher interest rate, have mortgage insurance added to the loan, and may be harder for the borrower to qualify for.

* Mortgage Loan
A mortgage loan is money you borrow from a lender to finance the purchase of real estate, the land, house, and all other buildings.

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