Understanding Mortgage Insurance - by beconrad
First-time home buyers face a number of challenges -- and a few confusing acronyms. From terms like APR and ARM to FICO and FHA, first-time buyers need to educate themselves about a number of arcane subjects.
The acronym PMI also plays a large role in the lives of first-time home buyers. PMI stands for private mortgage insurance, and chances are you will encounter it when you start to shop for a loan.
Unlike other forms of insurance, which are designed to protect you from hazards, private mortgage insurance provides protection to the lender. Specifically, private mortgage insurance ensures that the lender gets paid even if you default on the loan.
While the primary benefit of private mortgage insurance is to the lender, it has its advantages for buyers as well. The main advantage of PMI for the buyer involves the down payment, something that concerns many first-time buyers.
Without private mortgage insurance to protect them, few lenders would be willing to write loans for home buyers who lack a 20 percent down payment. With PMI, the mortgage lenders can write those loans, and more first-time home buyers can enter the market.
Of course private mortgage insurance is not free, and you can expect to pay the price for not having a 20 percent down payment. The cost of private mortgage insurance varies, but it typically runs inverse to your down payment and credit score. First-time home buyers with low credit scores and low down payments usually pay the highest PMI premiums, while those with higher down payments and better credit scores pay less.
In a perfect world, all first-time home buyers would be able to put 20 percent down on the properties they buy. In the real world, with the typical house costing more than $200,000, scraping together $40,000 to $50,000 is simply not feasible for many buyers. Private mortgage insurance helps the housing market by protecting the lender from default and allows many more first-time buyers to enter the market and enjoy the many benefits of home ownership.