Private Mortgage Insurance (PMI) is a type of insurance for conventional loans with a down payment of less than 20%. PMI protects the lender in the event that the borrower defaults on the mortgage.
The purpose of PMI is to mitigate the risk faced by the lender when approving a loan with a lower down payment. By requiring PMI, the lender is provided with a degree of protection against potential losses if the borrower fails to make their mortgage payments and the property goes into foreclosure.
The borrower pays PMI as part of their monthly mortgage payment or as a separate premium. The cost of PMI can vary depending on factors such as the loan amount, credit score, and the specific terms of the mortgage. It is important to note that once the borrower’s equity in the home reaches 20% or more, they may be able to request the cancellation of PMI, subject to certain conditions and lender requirements.
There are other alternatives to PMI, such as lender-paid mortgage insurance (LPMI) or a piggyback loan. In that case, a second mortgage is taken out to cover a portion of the down payment. These alternatives may have different requirements and considerations, so it’s advisable to consult with a mortgage professional to determine the best option based on individual circumstances.
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