It also requires loan servicers to send annual disclosures to all mortgage borrowers about PMI and how to initiate early cancellation. Private mortgage insurance is a type of insurance which protects the lender in the event the borrower defaults on the loan. Most lenders require borrowers to pay PMI premiums whenever they make a down payment of less than 20 percent of the purchase price. The loan servicer collects these monthly premiums and pays them to a private mortgage insurance company. In some cases, the PMI premiums are an un-itemized component of the mortgage payment, so the home buyer may not even be aware of the extra monthly expense.
Homeowners sometimes confuse private mortgage insurance with two other common types of insurance.
Mortgage life insurance pays off all or a portion of your mortgage in the event of your death. Homeowners insurance protects you from loss due to home damage from fire, floods and other disasters. The theory is that borrowers with at least a 20 percent equity stake in their home are more committed to their investment, more likely to keep up with their payments and less likely to default on the loan. For this reason, few lenders allow 100 percent financing, even if part of the loan is financed by the seller or another lender. Lenders have had to lower their down payment requirements over the years because rising home prices have far outstripped the rise in wages and savings.