Private Mortgage Insurance is required on all loan transactions where the down payment on a home is less than 20 percent of the appraised value or sale price. This can help you purchase a home that you might not normally be able to afford because your lender is now protected against any default on the loan.
Lenders have found that borrowers who put down less than 20 percent are more likely to default on the loan. Since PMI coverage is insurance for the lender, not the homeowner, you can’t choose the PMI company. PMI costs vary from one mortgage insurance firm to another, so you can shop around when choosing your mortgage lender. Premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years.
There are ways to avoid Private Mortgage Insurance. The most obvious way is to come up with a 20% down payment towards the purchase. This will eliminate the cost of PMI completely. Also, many lenders offer a loan called an “80/10/10.” This will allow you to avoid PMI by getting an immediate 2nd mortgage when you purchase the home. You’ll have a first mortgage of 80 percent of the home’s value, a second mortgage of 10 percent of the home’s value, and you’ll make a 10 percent down payment.
Remember, PMI is coverage for the lender, not the borrower. Meaning, some lender will allow you to cancel your PMI coverage when you have 20 percent equity in the home and a clean payment history.
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