Private Mortgage Insurance (PMI)

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When you obtain a mortgage, the lender might require you to provide at least 20 percent of the price of the house as a down payment. For example, if the house costs $100,000, the required down payment might be at least $20,000. If you can't afford that much money, the lender will probably require you to buy private mortgage insurance. PMI does not protect you; it protects the lender in the event you default on the loan. When that happens, the lender usually first has to obtain the title to the property and then sell the property. If the proceeds from the sale are not enough to cover the amount loaned, the private mortgage insurance company will typically make up the shortfall, plus reimburse additional costs incurred by the lender during the foreclosure process. When you have paid down the original mortgage to 78% of the purchase price, the lender is typically required to cancel the mortgage insurance. This provision was part of the federal government Homeowners Protection Act that came into effect in 1999. The act also allows the homeowner, in certain circumstances, to request cancellation of the insurance. If you are forced into buying PMI, it's a good idea to look into the cancellation provisions before you proceed with the loan. Instead of making you buy PMI, your lender might agree to increase your interest rate a little - say, a quarter of a percent. Your monthly repayments will then go up, but overall, you may be saving money by not paying for the PMI. Alternatively, you could try to get a second mortgage - which means borrowing even more money - to reduce the size of the down payment. The federal government also provides insurance for lenders through the Federal Housing Authority, although then it is just called mortgage insurance because it is not being provided by the private (nongovernmental) sector. See also Loan-to-Value Ratio and Piggyback Loan.