What Is Private Mortgage Insurance?

Private Mortgage Insurance provides important protection for mortgage lenders by guaranteeing them against the losses that may occur if the borrower is unable to repay their debt. There are also benefits for the borrowers themselves since they will be able to buy a home with a smaller deposit.

Private Mortgage Insurance has had some bad press, but since 1998 when the Homeowners Protection Act came into effect, many of these problems have been solved. One reason why Private Mortgage Insurance was causing trouble before 1998 was that homeowners were not being kept informed about the payments they were making. Private Mortgage Insurance payments were being taken alongside the mortgage repayments as a hidden cost that was not being properly explained to the borrower. Many people did not realize that they had this insurance or what it meant for them.

Today, however, lenders must inform their borrowers that they have Private Mortgage Insurance. They must also explain what this means and how it can be cancelled. Borrowers may cancel their Private Mortgage Insurance once they have built up equity of 20 percent in their property. Policies that have been taken out after the 29th of July 1999 are automatically cancelled when the borrower has 22 percent equity. If the policy is not cancelled in time, the lender will have to return any extra payments to the borrower.

Private Mortgage Insurance is not the same as mortgage life insurance. The life insurance will ensure that part or all of the mortgage is paid if the borrower dies, ensuring that their property will be inherited by their dependents. Private Mortgage Insurance protects against default by the borrower. This is why it can be cancelled once a certain amount of equity has been built up. After repaying so much of their debt, the borrower is less likely to default on their mortgage.

Since the lender is protected against default, they will be willing to accept a smaller deposit from borrowers who have Private Mortgage Insurance. Without it, a deposit will normally be approximately 20 percent of the property value, but with Private Mortgage Insurance, deposits of as little as 5 percent may be accepted by the lender.

It is the lender who chooses the Private Mortgage Insurance provider. There are only eight insurers in the United States who can provide this type of insurance. The buyer will have to accept the rates of the provider chosen by their lender, and they will not be given a copy of the Private Mortgage Insurance policy.

The process of canceling Private Mortgage Insurance will vary between lenders and policy providers. Borrowers who want to cancel this insurance will need to contact their lender to find out how it should be done. Generally, there will be certain requirements for cancellation, such as having made insurance payments for a specified minimum period, having an outstanding balance that is less than 75 to 80 percent of the current property value and having a good repayment history. Structural improvements or changes in the real estate market that have altered the value of the property should be taken into account when determining its current value.

Borrowers who qualify for cancellation of their Private Mortgage Insurance will usually need to contact their lender in writing, providing their name, loan number, social security number, phone number and the address of the mortgaged property as well as a statement of their wish to cancel the Private Mortgage Insurance. A written cancellation request will usually be necessary, but the lender can be contacted by phone to find out how to cancel the Private Mortgage Insurance policy. The lender may require additional information or an appraisal of the property before they will agree to the cancellation.