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If you’re getting a mortgage, you will first need to understand the term private mortgage insurance, also known as PMI. PMI, which nearly became extinct during the real estate boom years, is an insurance product created solely for the benefit of a lender, although the borrower usually pays it. It gives limited protection to a homeowner’s lender if a loan goes into default and foreclosure.
Traditionally, when getting a mortgage, if you have a 20 percent down payment, you won’t need to worry about PMI. But if you have less than 20 percent to put down toward the purchase of your home, or if you are trying to refinance your existing home and its value has gone down, you might have to consider paying for PMI.
You will generally pay for PMI with your monthly loan payment to your lender. However, there are loan programs that might allow you to make a one-time payment or a yearly payment for your mortgage insurance (MI).
Avoid Mortgage Insurance on a Loan
Here are some ways that you may be able to avoid paying MI on a loan.
Remember that if you chose a higher interest rate for your loan as a way to cover your MI and you then keep the loan for its entire term, you may end up paying much more over the long term. On the other hand, if you pay the MI up front and refinance or sell shortly thereafter, you may lose some of that payment.
If you can avoid paying for mortgage insurance, and you don’t end up with a higher interest rate on your loan, remember to make sure your other options related to your loan work for you and don’t place an undue burden on you down the road.
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Samuel Tamkin is a Chicago-based real estate attorney with more than 20 years of experience working with residential and commercial clients. Sam received his law degree from the University of Illinois College of Law in Champaign-Urbana. Sam currently practices as a real estate lawyer in Chicago, and his Ask the Lawyer column is syndicated in newspapers across the United States.
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