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Private Mortgage Insurance

Private mortgage insurance (PMI) is something that you, as a borrower, pay for, which is for the benefit of the lender. It guarantees that if you default on your loan, the lender will still be paid. It means you have more to pay every month, but it may also mean the difference between being accepted or denied.

Usually, unless you have spotless credit, you will be required to purchase PMI if you are putting less than 20 percent down on your property. Nobody likes having to pay extra money, but without it, a banker, even a subprime lender with flexible rules and a heart of gold, will be much less likely to issue a loan.

It’s no guarantee, but your willingness to purchase PMI will weigh heavily in the decision whether to grant you a loan, if you have poor credit and/or a low down payment.
You should, however, be able to find out ahead of time approximately what your PMI premiums will be.

If a banker is unwilling to tell you this information, you be in for a shock. Although it will usually not exceed $100, in some rare cases it might be several hundred, and if you don’t know that until you get to the closing table, you’re going to be facing some tough last-minute decisions.

The Homeowners Protection Act sets out guidelines for when you can cancel your PMI policy. You may request that it be terminated once you reach 20 percent equity, and it must be terminated automatically when you reach 22 percent. The bank doesn’t have to cancel it once you have reached those thresholds if you have not been on time with your payments or have other liens on the property. If the lender, instead of you, pays the PMI, the Homeowners Protection Act does not apply.