- Mortgage insurance, sometimes called private mortgage insurance or PMI, is an agreement made between a lender and an insurance company in which the company pays the lender in the event the borrower defaults on the loan.
- If a borrower stops making payments on his or her mortgage, the home is entered into foreclosure and sold. The lender receives the proceeds from the sale of the home. Any amount that exceeds the sale price of the home is covered by the mortgage insurance company.
- Mortgage insurance is usually required for people who are borrowing more than 80 percent of what an appraiser estimates the property to be worth. In such cases, the mortgage lender may require that the borrowers obtain PMI as a condition of the loan approval.
- If a mortgage company requires a borrower to have mortgage insurance, the borrower is responsible for paying the annual, quarterly or monthly premium. The amount is added into the mortgage payment and is paid directly by the lender to the insurance company, and it continues until the borrower has paid the mortgage down to less than 80 percent of the home's appraised value.
- For mortgage companies, the addition of mortgage insurance mitigates some of the risk they assume in lending money. Borrowers benefit by not having to come up with 20 percent of a home's value as a down payment in order to qualify for a mortgage.
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