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When do I need Private Mortgage Insurance (PMI)?
If the down payment on your home is less than 20%, your lender will probably
require that you get private mortgage insurance. This insurance insures the lender
against possible default on the loan. It is not to be confused with mortgage life
insurance or homeowners insurance.
The cost of PMI is divided into two parts. The first part is a payment made at
the loan closing. The second part is an ongoing payment made each month along
with the principal and interest payment.
Normally, PMI may be removed if you have reduced the principal amount of your
loan to 80% or lower than the original purchase price. It also may be removed
if you have obtained an independent appraisal stating that the outstanding principal
amount of the loan is 80% or lower than the appraised value.
Some lenders do not require PMI. Instead, they may increase their origination
fee and/or the interest rate on the loan. This can represent a significant advantage
to the borrower since PMI premiums are not deductible for tax purposes and mortgage
interest is usually deductible.
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