Private Mortgage Insurance 101

Before the advent of mortgage insurance, the average home buyer was required to put a minimum of 20% down to purchase a home.  This sizeable down payment reduced a lender's risk in the event of foreclosure or default of the loan by creating a large enough equity position in the home to cover the cost of selling the home, recovering any expenses incurred during the foreclosure process, and adding a little profit into the margin.

In the 1950's several entrepreneurs began testing the market for mortgage insurance.  In May of 1956, Congress passed legislation expanding the role of FHA and in 1957, the first modern day mortgage insurance company opened in Milwaukee and opened the door to the beginning of low down payment conventional loans.  Progress was slow until 1971, when a regulatory authorities expanded lending limits for conventional loans, up to 95% of appraised value. 

Private mortgage insurance (also known as PMI) protects lenders against loss due to foreclosure.  This protection allows lenders to offer more mortgage loans with low down payments (and in some cases, no down payments).  Private mortgage insurance is not life insurance, as some insurance agents would like you to believe.  Private mortgage insurance only protects the lender.  Mortgage life insurance protects your home and family by paying all or a portion of the mortgage in the event of your death.

For many home buyers, private mortgage insurance is a necessary evil.  There is no benefit to the home buyer. Though the amount paid each month is determined by the type of loan and the percentage the home buyer puts down, most home buyers will have one form of mortgage insurance or another.

However, the Federal Government passed the "Homeowner's Protection Act of 1997" that reformed the then current private mortgage insurance regulations.  The key provision of this law forces most lenders to automatically cancel private mortgage insurance when the home owner's mortgage reaches 78% of the home's original purchase price.  Unfortunately this only applied to loans originated after July 29, 1999. 

To begin, select from the column on the right.