What Is PMI?
What is PMI, you ask? Private Mortgage Insurance, also known as Lender's Mortgage Insurance, is an insurance policy a buyer must pay for on behalf of their lender if they are borrowing over 80% of the appraised value of the home. If you are looking to purchase a home and are needing to finance 100% of your loan, you may be subject to pay PMI.
A Better Understanding
Let's try to gain a basic understanding of why this insurance must be paid; shall we? Imagine you were going to loan a friend of yours $5000 for a used car, and in return, the car was to be put in your name (owned by you) until he has paid you back. The used car is also worth only $5000 on the market, so if your friend someone can't repay you, you are stuck selling a car in unknown condition.
This is the same dilemma lenders go through! When money is lent to buyers, you can have all the credit checks and history scrutiny in the world, yet unpredictible events can still happen in a person's life that would inhibit them from paying their mortgage. Thus, the lender must insure themselves against any losses in the case something like this were to happen. Also, you can see that I mentioned "condition". In the simple example above, the investment was a mere $5000 which pales in comparison to a $100,000 home.
This insurance also covers the lenders costs in case the home is foreclosed on in a "not-so-great" condition. Think if there wasn't an insurance and you received a used car lent to your friend that was in undrivable condition, yet you are still a negative $5000 in your bank.
How To Avoid PMI
You can avoid PMI either by financing two loans on your home with two different lenders (your mortgage professional can help you with this - it's called an 80-20), or by putting 20% cash down on your property and financined 80%.
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