Private Mortgage Insurance (PMI)

With increases in foreclosures and more homeowners unable to pay their mortgage on time each month, mortgage protection insurance is a way for lenders to help ensure they receive their money on home loans. This is also known as PMI, or Private Mortgage Insurance. Two classes of borrowers are usually required to have PMI.

The first are buyers with a lower credit score and lower income, who often qualify for certain mortgage programs. The other type are people whose total loan value is 80% or higher of the value of the home. In other words, people who put less than 20% down on the home are usually required to pay mortgage protection insurance. The purpose of this insurance is to allow more people to be able to afford a home with a smaller down payment. The cost is fairly low, and is calculated into the borrower’s total mortgage payment each month. Once the loan amount has been reduced to about 78% of the home’s value or less, the borrower can ask that the insurance be removed.

Depending on the year you obtain your loan, this mortgage insurance may be deducted on your taxes. For example, all new home loans obtained in 2007 are allowed to deduct their mortgage protection insurance. Be sure to consult a tax professional to determine whether or not you will be able to deduct it this coming year. There is another benefit to mortgage protection insurance. If you happen to fall on hard financial times, the insurance is there to help protect you from losing your home. Your monthly payments can be covered for a certain amount of time with this insurance until you can get back on your feet. While many borrowers are leery of mortgage protection insurance, it really can be a positive thing, particularly for people who are new to the whole home purchasing process.