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What Is Private Mortgage Insurance?

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Private mortgage insurance (PMI) is a form of loan insurance that protects the lender against the risk of default and foreclosure. It allows borrowers to purchase homes without making a 20% down payment and is generally required for loan-to-value ratios over 80%.

Private Mortgage Insurance

Many lenders will waive this requirement once the buyer has paid at least 80 percent of the total cost of the home. In some cases, the down payment may be as low as 3%, so the lender may require a higher amount of PMI.

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PMI comes in two forms: lender-paid and borrower-paid. The latter is more expensive than the former Mortgage Adviser Swindon, and you must pay the premiums on a yearly basis. It may be a good idea to have both types of PMI, as both types protect the lender.

Borrower-paid PMI can be eliminated when the buyer has 20% equity, and the lender-paid version is usually eliminated automatically once the home has at least 22% equity.

If you can’t make your monthly mortgage payments, your lender may require you to purchase PMI. This extra insurance will protect the lender in case you default on the loan. Fortunately, there is a federal law that allows you to cancel PMI if you don’t need it anymore.

According to the law, home mortgages signed on or after July 29, 1999, will automatically terminate PMI when the homeowner has built up 22 percent equity and is current with mortgage payments. Those who signed on prior to that date may cancel PMI at any time by requesting the lender to cancel it.