Private Mortage Insurance

The Mortgage Industry's Dirty LIttle Secret

By Timothy Sexton, published Apr 06, 2006
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Unless your credit rating is in worse shape than President Bush's approval ratings, you can probably wrangle a mortgage out of some company somewhere. Any time you hear horror stories from people about their nightmare in securing a mortgage, more often than not the cause of the problem is their credit rating. The reason why mortgages are often easier to secure than other types of loans is because of the house itself. You see, a mortgage has a built-in asset than many other loans simply don't. The house itself. The lender is presented with a risk even if the borrower does default on the loan. Often this risk amounts to just the difference between the home's value and outstanding debt on the home, less the costs involved in foreclosure and reselling the property.

Mortgage companies are not exactly what you would call overly desirous of lending more than a certain percentage of a home's value due to the danger of the borrower defaulting when there is only a small difference between the home's value and the amount of the outstanding debt. Because lenders don't like to do this, they provide themselves a cushion. Mortgage companies will only lend 80% of the home's value. Why? Because by doing this, they give themselves a measure of insurance against any potential default on the loan.

Did You Know?
Private Mortgage Insurance is a supplemental policy designed to protect the lender in case the borrower should default on the loan with the value of the house lower than the loan balance.
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