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What is PMI and can it be avoided?

If you’re buying a home with a conventional mortgage loan and your down payment less than 20% of the purchase price, you will be expected to pay an additional cost: private mortgage insurance (PMI).  PMI protects your mortgage lender in the event that you stop making payments on your home loan.

PMI will be paid on the loan until you have paid the loan down to 80% of the home’s value when you purchased it.  At that time the PMI will automatically be canceled and no further payments for PMI are required.  If you are able to pay down your loan faster than originally scheduled, you can request that your lender cancels the PMI early.  

Alternative to PMI

Lender-paid mortgage insurance is an alternative to paying private mortgage insurance.  With lender-paid mortgage insurance, a lender will pay your mortgage insurance premium upfront and pass the cost along to you with a higher interest rate on your home loan.

Your monthly payment with lender-paid mortgage insurance may be lower than what you would pay with PMI. But unlike PMI, lender-paid mortgage insurance cannot be canceled or terminated continues for the life of the loan.  Depending on the length of time you plan on staying in your home as well as the term of your loan, PMI could be the better choice.  

Be sure to consider your future plans and look at the payment and cost calculations for each scenario before choosing an insurance.


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