PMI stands for Private Mortgage Insurance, It is a special kind of insurance that lenders may require the borrower to purchase if the loan they are taking out is 80% or higher of the value of the real estate. In other words, buyers with less than a 20% down payment are normally required to pay PMI. This protects the lender in case borrower don’t make house payments. It’s certainly not the most exciting type of insurance because it doesn’t insure borrower against anything—it only insures your lender. Private Mortgage Insurance is just one of the expenses that normally go along with getting a loan to buy a home. No one likes having an extra expense tacked on to their monthly mortgage payment, but it’s a requirement when your loan-to-value ratio (LTV) is 80% or more. In other words, when you borrow more than 80% of the value of a property, you can expect to pay PMI. It is essentially a mortgage guarantee offered by a private insurance company. It allows hopeful homeowners to make a smaller down payment-like only 5 or 10 percent-because it protects the lender, the holder of the mortgage, against any loss if the borrower defaults on the mortgage.
For example, if you buy a house for Rs 200,000 and make anything less than a 20%, or Rs 40,000, down payment, your mortgage payment will be increased by a monthly PMI premium. Or once the borrower has paid back enough of the loan so that it is less than 80% of the value, the borrow have rights for getting rid of the policy so you don’t have to continue making PMI payments forever.
The reason lenders make you pay for PMI is because they consider any loan with less than a 20% down payment is somewhat risky. So they require you to mitigate their risk by covering the cost of PMI on their behalf. PMI does give the lender some level of protection against loss when a borrower doesn’t pay up. For Example If borrower will fail to pay. the insurance company will pay the bank the difference between 20% and the amount you actually put down. If you put down 5% and default, the insurance company pays the bank the other 15% that you didn’t pay.
The cost of PMI varies depending on the type and term of the mortgage you have. It could range from one-half to one percent of the loan amount per year. In the case of a Rs 200,000 house where you put 10% down (Rs 20,000) and financed Rs180,000, your PMI premium could cost anywhere from Rs 75 to Rs 150 per month.