February 6, 2009, Newsletter Issue #154: The Purpose for Private Mortgage Insurance

Tip of the Week

Most homeowners paying private mortgage insurance believe that it has no purpose other than to annoy them. The truth is that private mortgage insurance became a necessity to lending institutions after years of loans being defaulted on and properties being foreclosed.

Private mortgage insurance is not just insurance for the lender, it is insurance for everyone. Let me explain. You see, we have all grown accustomed to the low interest rates being offered by lenders over the last few years. These rates are great and we all want them to stick around, right? Well, without private mortgage insurance, lending out money on homes would be a much riskier proposition for most banks. Banks do not like higher risk and it is usually met with higher costs. For mortgage loans, this almost always means higher rates.

With private mortgage insurance, lenders can feel more security, overall, in their ability to offer good loans to the public. Next time you are looking at your mortgage payment coupon and are thinking bad things about your private mortgage insurance, look to the other part of the coupon where it has your rate and remember that you probably wouldn't be getting it if it were not for banks being able to institute private mortgage insurance.

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