Legal Definitions - private mortgage insurance

Private Mortgage Insurance (PMI) is a type of insurance policy that protects the mortgage lender (such as a bank or credit union) against financial loss if a homeowner stops making their mortgage payments and defaults on the loan. While the borrower pays the premiums for PMI, the coverage is solely for the benefit of the lender. Lenders typically require borrowers to purchase PMI when they make a down payment of less than 20% of the home's purchase price on a conventional loan. This insurance allows lenders to approve loans with lower down payments, making homeownership more accessible to individuals who may not have substantial savings for a large down payment.

• Scenario 1: First-Time Homebuyer with Limited Savings

  Sarah and Tom are excited to buy their first home, which costs $300,000. They have saved diligently but can only afford a 10% down payment ($30,000). Since their down payment is less than 20% of the home's value, their lender requires them to pay for Private Mortgage Insurance. This allows the lender to approve their mortgage application, knowing that if Sarah and Tom were to default, the insurance would cover a portion of the lender's potential losses, even with their smaller initial equity in the home.

• Scenario 2: Professional Relocating for a New Job

  Maria needs to quickly purchase a new home in a different city for a job relocation. Most of her savings are tied up in investments, so she decides to make a 15% down payment on her new $450,000 house. Because her down payment is below the 20% threshold, her mortgage lender mandates Private Mortgage Insurance. This insurance reduces the lender's risk exposure, enabling Maria to secure the loan and move into her new home without having to liquidate other assets to reach a 20% down payment.

• Scenario 3: Refinancing with Insufficient Home Equity

  David wants to refinance his existing mortgage to take advantage of lower interest rates. However, after several years, his home's value has not significantly increased, and he still owes 82% of its current market value. When he applies for the new loan, the refinancing lender determines that his loan-to-value (LTV) ratio is above 80%. Consequently, the lender requires David to pay for Private Mortgage Insurance on the new loan. This protects the new lender from potential losses because David's equity in the home is still relatively low, representing a higher risk for the lender.