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What is Private mortgage Insurance?

Written by: Adam Smith

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.

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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