Private mortgage insurance is a monthly premium that protects the lender if you default on your loan. PMI is typically required on conventional mortgages when your down payment is less than 20%.
PMI exists because loans with less than 20% equity are considered higher risk. If the borrower defaults and the home is sold in foreclosure, a low-equity loan is more likely to result in a loss for the lender. PMI covers that gap, but the borrower pays the premium.
PMI costs vary based on your credit score, loan-to-value ratio, and loan amount, but typically range from 0.3% to 1.5% of the original loan amount per year. On a $300,000 mortgage, that could be $75 to $375 per month added to your payment.
The good news is that PMI on conventional loans can be removed. Once your loan balance reaches 80% of the original purchase price (or current appraised value in some cases), you can request cancellation. By law, the lender must automatically cancel PMI when your balance reaches 78% of the original value. Refinancing into a new loan with at least 20% equity is another way to eliminate PMI.
The loan-to-value ratio is the percentage of your home's appraised value that is financed by the mortgage. LTV is calculated by dividing your loan amount by the home's value.
EquityEquity is the difference between your home's current market value and the amount you still owe on your mortgage. It represents the portion of the home you truly own.
Conventional LoanA conventional loan is a mortgage that is not backed by a government agency like the FHA, VA, or USDA. Conventional loans typically require higher credit scores and larger down payments but offer competitive rates.
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