What is Private Mortgage Insurance?

Private mortgage insurance is much more prevalent today than it was just a few decades ago. Unfortunately there is some confusion as to what purpose this type of mortgage insurance serves. Without going into detail, private mortgage insurance helps more people qualify to buy a house. Thus it serves the purpose of making the option of owning a house a reality to more people. Now, to understand just how it works lets take a look at an example.

Private Mortgage Insurance Example: Tom and Betty Buy a Foreclosure

Suppose Tom and Betty are interested in buying a house. They both work for an hourly wage and find themselves making just enough to qualify for a mortgage loan on a foreclosure. In fact they chose to buy a foreclosure because it was the only type of house on the market that was even close to their price range.

When Tom and Betty went to talk to their mortgage broker they were surprised to learn a few things. The mortgage lender was expecting Tom and Betty to put 20 percent down on the house. As it is, Tom and Betty are just barely scraping buy. They have a little bit of money saved up for a down payment, but it certainly doesn't equal the 20 percent down the mortgage lender is asking. Suddenly Tom is worried that they won't be able to afford to buy this foreclosure after all.

Worried he is going to lose this opportunity to buy a foreclosure Tom asks the mortgage lender if there is any other way to qualify for the mortgage loan. As it turns out, the mortgage lender is willing to make the loan on one provision - private mortgage insurance must be purchased. Tom isn't sure what private mortgage insurance is so he asks the mortgage lender how it works.

The lender explains that each month Tom will pay an insurance premium in addition to his mortgage payment. This insurance premium will go to a private insurance company which provides assurance to the mortgage lender that should Tom default on the mortgage loan he has signed the insurance company will make good on payment of the balance of the loan to the mortgage lender. Because the mortgage lender now has a mortgage loan that is backed by Tom and Betty as well as the private insurance company, they are willing to accept Tom's application for the loan.

In much the same way as the example, private mortgage insurance has helped millions of young couples buy their first home without requiring a big down payment. Mortgage lenders are willing to accept such terms because most of the risk of defaulting on the mortgage loan has been diversified away to another party. It proves beneficial to home buyers because it helps them move into a home faster by eliminating the need for a bigger down payment.

The success of private mortgage insurance has spread over the last 10 years or so and it has certainly contributed to the strong real estate market that we are witnessing today. Private mortgage insurance has assisted in helping many potential home buyers move from the do not qualify list to the qualify list, allowing many to move their families out of apartments and into homes.
 
 
About the Author

Adam Smith is an informational author for 10X Marketing. Many more housing options are available to you, such as short term housing or the ever popular rent to own plan. Learn more about these options as the OneMinuteMillionaire.com site.

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