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Private Mortgage Insurance, or PMI, is insurance purchased by the buyer to protect the lender in
case the buyer defaults on the loan. PMI is generally applied when you put down less than 20% of the home's
purchase price.
The reason is this:
With 20% down, you are considered a low risk. Even if you default the lender will probably
come out ahead because they've only loaned 80% of the home's value and they can probably recoup at least
that amount when they sell the foreclosed property.
But with 5% or 10% down, the lender has a lot more invested in the loan and if you default,
they will almost surely lose money. This is why lenders require buyers to purchase PMI if they put down
less than 20%. It's insurance that, no matter what happens, the lender will recoup its investment.
How does PMI increase your buying power?
In simplest terms, PMI allows you to put less money down, and the benefits are as follows:
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- If you have good credit but are short on cash for a downpayment you can put as little as 5% down.
- It doesn't take as long to accumulate a 5% or 10% downpayment so you could buy a home much sooner
than you anticipated.
- A smaller downpayment allows you to purchase a larger or nicer home.
- For repeat buyers, a smaller downpayment on the new home can free up cash from the sale of their
previous home to use for other debts or expenses.
- Your interest will be higher if you put down less than 20%, but that interest is tax-deductible.
What does PMI cost?
A Good Faith Estimate will be provided to you within a few days after we received your loan application.
This disclosure will provide you with an estimate of your monthly PMI premium as well as the initial
premium you'll need to pay at closing. Additionally, we will be providing you a disclosure on your rights
(if applicable) to cancel the PMI.
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