Private Mortgage Insurance (PMI)
Definition:
Private Mortgage Insurance (PMI) is a type of insurance required by lenders when a borrower puts down less than 20% of the home’s purchase price. PMI protects the lender in case the borrower defaults on the loan. While it benefits the lender, PMI is paid by the borrower in the form of monthly premiums that are added to the mortgage payment. PMI is typically required for conventional loans with low down payments.
🔍 Did You Know?
Borrowers can usually cancel PMI once they’ve built up 20% equity in their home, either through payments or property appreciation.
Examples:
Example 1:
A homebuyer purchases a property for $300,000 with a 10% down payment. Since the down payment is less than 20%, the lender requires PMI, which costs the borrower an additional $150 per month until they reach 20% equity in the home.
Example 2:
An investor buys a rental property with a low down payment and is required to pay PMI. After a few years, the property’s value increases, and they reach 20% equity. The investor contacts the lender to cancel the PMI and reduce their monthly mortgage payment.
Why It’s Important:
PMI allows homebuyers to purchase a home with a lower down payment, making homeownership more accessible. However, it increases the monthly mortgage payment until enough equity is built up to cancel it. Understanding when and how to remove PMI can help borrowers reduce costs over time. For real estate investors, managing PMI effectively can improve cash flow and overall investment returns.
Who Should Care:
- Homebuyers with less than 20% down payment who are required to pay PMI.
- Real estate investors who want to minimize their carrying costs by canceling PMI once they’ve reached 20% equity.
- Lenders who use PMI to protect against borrower default on low-down-payment loans.
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