Private Mortgage Insurance

From ArticleWorld

Private mortgage insurance is a cover against a loss by a lender in the event of default by a borrower (mortgagor). The premium is paid by the borrower and is included in the mortgage payment. This insurance is provided by a private company that is helping to protect the mortgage lender against mortgage default.

What it means

By and large this insurance is taken out by the lender when the down payment is less than 20% of the properly value or if the amount financed is greater than 80 percent of the mortgaged property of the borrower.

In case the borrower cannot make the 20% down payment, lenders will settle for much lower payments, in some cases even as low as 5%. In such cases the borrower is required to be covered with a private mortgage insurance which may further require an initial premium payment as well as an additional monthly fee.

Interestingly, the law provides ways to avoid the mortgage insurance. In case the borrower cannot make the 20% down payment, they are allowed by law to get a loan of 80% and a further loan of 10% of the value of the property and get away with making only a 10% down payment. The second loan is popularly known as the piggy back loan and the program as 80/10/10. It may also be turned into a 80/15/5 program with the borrower needing to make only 5% as down payment and get a 15% piggy back loan.