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Posted by on 06/25/2021

What is Private Mortgage Insurance?

The name sounds posh, but don't let the spiffy name trick you. Private mortgage insurance works a bit differently than other forms of insurance like health or life insurance. To understand how it's different, you first have to understand what it is. Investopedia.com defines private mortgage insurance, which is sometimes abbreviated as PMI, as "A policy provided by private mortgage insurers to protect lenders against loss if a borrower defaults." Yes, you read that correctly; private mortgage insurance is insurance coverage for your mortgage loan provider on which you pay the premium. That's the first difference.

The second major difference between private mortgage insurance and many other forms of insurance is that PMI is not optional. A mortgage lender can require that you, as a homebuyer, pay private mortgage insurance if you do not or cannot afford to make at least a 20% down payment towards the purchase of your home. Though many aspects of your mortgage loan may be negotiable, PMI typically is not; it's usually a condition on unconventional loans.

Generally, PMI is added on to the cost of your loan. The cost for PMI can vary based on the provider from whom you obtain the PMI but a good rule of thumb is the 0.5% rule. That's to say that the annual cost for most private mortgage insurance will be approximately 0.5% of the mortgage loan price. Let's look at an example to see how the financials look...

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