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Private mortgage insurance (PMI)

PMI, also known as private mortgage insurance, protects the lender. It does not the borrower if you stop making payments on the loan. PMI is required when you make a down payment of less than 20 percent on a conventional home purchase or if you are refinancing and your equity is less than 20 percent of the value of your home.

Paying for PMI

The most common way to pay for PMI is to pay a monthly premium, which is added to your mortgage payment. You will find the premium on your Loan Estimate (formerly the GFE), and the Closing Disclosure (formerly the HUD) on page 1 in the Projected Payment section. There is an upfront premium that is shown on page 2 of the Loan Estimate and Closing Disclosure.

There is also an option to purchase the mortgage insurance. Your loan officer should help you calculate the total cost over different time frames to see if it is beneficial to you.

PMI is not all bad

It can help borrowers qualify for a loan they may not otherwise be able to get. It does increase the cost of the loan, and if you get into a financial bind on your mortgage it does not protect you from default.

PMI can be cancelled

Once the loan balance reaches 80 percent of the home’s original value, you can ask the lender to discontinue the mortgage insurance premiums. If the loan balance drops to 78 percent loan to- value, the lender is required to cancel private mortgage insurance.

Depending on which option is right for you, you can have access to fixed or adjustable rates as well as mortgages with no down payment requirement and no mortgage insurance. All of these factors can contribute to a lower monthly payment, allowing you to enjoy the benefits of homeownership while building your financial strength.