Private mortgage insurance protects a lender if a homeowner defaults on a loan. Lenders generally require mortgage insurance on low down payment loans, because studies show that a borrower with less than 20% invested in a home is more likely to default on a mortgage. In effect, the mortgage insurer shares the risk of foreclosures with the lender.
(*Based on a $100,000 purchase price)
Private Mortgage Insurance example
A borrower buying a $100,000
home makes a 10% or $10,000-down
payment.
The lender then obtains private
mortgage insurance on the borrower’s
$90,000 mortgage, reducing its risk
to loss from $90,000 to $67,500.
According to the recently passed
Homeowners Protection Act, private
mortgage insurance is automatically
canceled for borrowers on single-family,
owner-occupied homes when the loan
balance reaches 78% of the original
property value. The law also allows
borrowers with good repayment history
to request cancellation of MI when
their loan balance drops to 80%
of the original property value.
For more information on the Homeowners
Protection Act, contact your lender.
And now Private Mortgage Insurance
is tax deductible, in accordance
with the Tax Relief and Health Care
Act of 2006. Speak with your tax
professional for a full breakdown.
