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What is PMI?

by Mike

If you’re shopping for a house as a first time homebuyer you probably can’t afford to put down 20 percent of the sale price as a down payment.  That doesn’t mean you won’t be able to secure a mortgage or buy a home, but it does mean you’ll likely be required to pay private mortgage insurance.

PMI is a type of protection for the lender in case you default on the loan and the home ends up going into foreclosure.  The charge can vary depending on how much you are borrowing and how much you are putting down, but generally PMI costs somewhere between $50 and $150 per month.

Typically you will see PMI as a separate line item on your mortgage statement so you can see exactly how much it is costing you.  Some lenders have special programs that work a bit differently.  For example, instead of a separate fee they may simply raise the interest rate slightly.  The advantage of this method is that the extra interest you will pay is tax deductible, while private mortgage insurance is not.

However you end up paying for PMI, you will be relieved to know that you don’t have to pay it forever.  Once your equity in the home exceeds twenty percent you can call your lender and have them cancel the PMI.  It’s important that you remember to do this because your lender probably won’t bother informing you and you could continue paying PMI for years after it was no longer required.

To get your lender to cancel the PMI you’ll have to show that you actually have twenty percent equity in the home.  That means getting a professional appraisal done, which will run you about $300 to $500.  However you’ll quickly make that back after just a few months without private mortgage insurance.

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