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Private Mortgage Insurance

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What is a PMI and why do I need it?

PMI or Private Mortgage Insurance is an insurance policy taken out by the lender and paid by you.  It is required anytime your loan to value (LTV) exceeds 80% and helps to hedge against the greater risk associated with lower equity positions.  The cost of that insurance is a function of your LTV (ie..the lower the equity, the higher the cost,) your credit, and the type of loan transaction. 

PMI comes in a few different shapes and sizes with the two most common options being Borrower Paid Monthly and Lender Paid Upfront.  With Borrower Paid, the PMI expense is included in your monthly payment and required for a minimum of 24 months.  At the end of 24 months, the homeowner may request an updated appraised value.  If that value results in a 20% or more equity position, the PMI will be cancelled.  In absence of an updated value, the PMI will automatically be removed once the borrower reaches a 78% loan to value via their monthly payments.  Lender Paid MI is often a less expensive option but is 'baked' into the interest rate.  In this scenario, the borrower would agree to take a higher interest rate in lieu of paying PMI.  Again, this is typically provides a lower overall payment but cannot be removed since it was incorporated into the rate.  Based on recent changes in tax law, Borrower Paid Monthly PMI is no longer tax deductible which may also influence which route is best for you.

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