How does PMI work, and when is it required? This article takes an in-depth look at private mortgage insurance, including what it is, when it is required, and when it can be cancelled.
How Does PMI Work? Private Mortgage Insurance Defined
To understand what PMI is, you have to have a basic understanding of home financing. When you apply for a conventional home loan, you can put as little as 5% down. However, unless you put 20% down, lenders require you to pay PMI.
PMI is simply the lender’s protection in the event the owner defaults on the primary mortgage and stops making payments, causing the home to go into foreclosure. In this situation, the mortgage insurance reimburses the lender for the money they have lost.
Who Needs PMI?
PMI is applied to conventional loans. Federal Housing Administration (FHA) loans have their own mortgage insurance, while Veterans Administration (VA) loans do not require mortgage insurance, even though they require no down payment.
To continue reading, go to Part 2: How Does PMI Work?
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