What Is PMI Insurance? Who Needs It?

Most people who took out a loan to finance the purchase of their home are currently paying for Private Mortgage Insurance. It is often referred to as PMI insurance and it is required not for the protection of the homeowner, but for the protection of the mortgage lender.

PMI insurance only protects the lender in the case you go into default and stop making payments on your loan. This is very different from the homeowner's insurance which you carry to protect yourself against paying for extensive damages or making costly repairs on the property over time.

At the time you take out your mortgage, you will be legally required to take out a PMI policy if you are borrowing more than 80% of the value of the home. That means the only way to get out of purchasing private mortgage insurance at the start is to hand over a down payment of at least 20%.

You could be paying for a PMI insurance policy every month and not even realize it. That's because it is typically built into your monthly mortgage payments so the lender can personally ensure that the insurance is up to date and paid for. While this may be quite convenient most of the time, it can stand in the way of your legal right to cancel the PMI at some point.

Legally, once you have paid down your loan below 80%, you can stop the PMI payments. Of course, you have to know when you have reached that point and contact the lender on your own to request the payments stop. These are common with the typical ARM mortgage which are utilized to make less affordable home easier to finance. Beware that the ARM mortgage has been responsible for part of the housing downside.

It is in the best interest of the mortgage lender to keep the Private Mortgage Insurance in place for as long as possible. That is their only assurance that they will get their money back if you default on the loan. Yet in some cases, dropping it may be an option to keep the loan affordable so you don't default!