Private mortgage insurance

What is private mortgage insurance?: Private mortgage insurance enables borrowers to buy a home with less money down than would otherwise be required by lenders — in fact, it enables buyers to purchase a home with as little as a 3% to 5% down payment. Purchasing a home with less money down allows you to buy a home sooner, and use the money that you would have put toward a down payment on other things like repairs, appliances, etc.
Why is mortgage insurance required for me to get a loan?: Lenders require mortgage insurance on low-down-payment loans to help protect them against loss in case the borrower stops repaying the mortgage loan, or “defaults” on the loan. If this occurs, the lender goes through a process known as foreclosure in which it acquires title to the mortgaged property. After foreclosure, the lender sells the property in order to cover the amount owed the lender as well as all of the expenses associated with the foreclosure.

With low-down-payment loans, the amount of the loan and the market value, or purchase price, of the property are relatively close, and there is a risk that the amount realized from the foreclosure sale may not be enough to cover the full amount that is owed to the lender. Mortgage insurance allows the lender to recover part of that loss from the mortgage insurance company. So, mortgage insurance protects lenders against the risk of a loss and enables borrowers to buy homes with less money down.
What’s the difference between private mortgage insurance and FHA?: FHA financing is a government-sponsored insurance program. Private mortgage insurance generally costs less and is available for more types of loans.
Does mortgage insurance guarantee that I will make my payments?: No. No one but you is responsible for making your payments. If you should stop making your payments, the lender will recover some of its loss from the mortgage insurance company, but you will lose your home.
Will mortgage insurance pay off my mortgage if I die?: No. Mortgage insurance absorbs part of the financial loss for lenders if they must take the property back because borrowers defaulted on their loan. There is another type of insurance that pays off your mortgage if you should die called “credit life insurance.” Credit life insurance is not required by the lender. If you choose to obtain credit life insurance, you would purchase it separately and pay a separate premium for it. In contrast, the mortgage insurance premium is included in your monthly mortgage payment.