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Monday, December 7, 2009

What is PMI?

What is PMI?

With many personal budgets stretched to the limit and less money in savings, it is more difficult for first time home buyers to accumulate a traditional 20% down payment. Move-up buyers struggle to find down payment funds, too, especially if they haven't been in their current home long enough to see a significant increase in equity.

Private Mortgage Insurance
One home buying aid that nearly everyone can use is Private Mortgage Insurance, or PMI. This special insurance protects the lender if you default on your home loan. It makes it possible for you to purchase a home with as little as 3-5 % down.

Here's How PMI Works

1. You have a 5% down payment.
2. The lender wants to finance 80% or less of the home's value, since studies show that buyers who put less down are more likely to default.
3. The lender secures a private mortgage insurance policy for you and closes on the loan. You pay for the PMI policy at closing or (most often) you pay a fee with each monthly loan payment.
4. If you default, the lender receives the 15% you did not pay at closing.

PMI payments can be significant, so if you can avoid paying private mortgage insurance, that's great.

From Scott Larson of Towne Square Realty in Monroe, Wisconsin

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