What Is Primary Mortgage Insurance?

When a mortgage lending company approves your mortgage application, it takes on the risk that you may default on your loan. Though the lender can foreclose on the property if this happens, it still stands to lose money. Primary mortgage insurance covers a lender's risk, replacing some or all of the money it would lose in a mortgage loan default.

Primary mortgage insurance isn't always a requirement. Usually, lenders only require it when borrowers haven't made a significant investment in a property. If you put down at least 20 percent on the property you purchase, you can usually skip primary mortgage insurance, as you'll have significant equity in the property and lenders will see you as less of a risk.

Though mortgage insurance may only seem to benefit the lender, it might help you as well. Without such coverage, a lender would have to take on more risk to lend you money with less than 20 percent down. Some lenders might decide the risk is too great, requiring you to save up more money before buying a home.

The main disadvantage of primary mortgage insurance comes from the fact that you usually have to pay it monthly. Payments can represent a significant additional expense, though the amount depends on how much you put down on your home. According to Bankrate, primary mortgage insurance is typically between 0.5 percent and 1 percent of the total mortgage amount, but the amount you will have to pay depends on your lender and how much you put down. For a $250,000 mortgage, for example, you could end up paying $2,500 per year if you have to pay 1 percent of your mortgage amount. Divided by 12, that would equal $208.33 added to your mortgage payment per month. The more you put down, however, the less you'll have to pay in primary mortgage insurance premiums. In most cases, once you have accrued at least 20 percent equity in the property, you no longer have to maintain private mortgage insurance.

You do have some options for making primary mortgage insurance easier to bear, including negotiating with the lender to pay it for you. Insurance companies often give discounts to lenders who purchase this type of insurance for the borrower, making it cheaper overall. As part of the deal, however, the lender will likely raise your interest rate. A lender may also allow you to finance your primary mortgage payment by adding it to your total loan amount.