Private mortgage insurance is insurance that is usually required by the lender if the borrower is not able to put 20% down on a mortgage up front. Basically, this type of insurance protects the lender from losing money in the event of a default. If the property goes into foreclosure and the bank sells it at auction, it may not bring enough money to pay off the loan, which is why private mortgage insurance is usually required on behalf of the lender.
Typically, it costs about $55 a month to insure a $100,000 loan. Sometimes a bank will allow the borrower to discontinue payments once the loan to value (LTV) ratio reaches 80%, though usually the buyer pays until the LTV reaches 78%.
There are a few ways in which a homeowner can raise the ltv of his/her home. They can either pay a certain amount of it off over time, or they can get another appraisal done. If the appraisal shows that the home is worth more than it was, then the loan to value ratio raises.
Private mortgage insurance is just another way that lenders can protect themselves from default and foreclosure. Often, foreclosure can lead to a loss of money for a bank if private mortgage insurance is not obtained, which is why many banks require that it be acquired if the borrower cannot put down at least 20% up front. Having this down payment can save a buyer money, though if they do not have it, this type of insurance is a good alternative.