you buy the home and make a down payment of, say, 20 percent of
the purchase price, the lender is putting up the other 80 percent
of the purchase price. So if the home burns to the ground and is
a total loss, the lender may care more, at least financially, than
you do. In most states, your home is the lender's security for the
Almost all lenders today require you to purchase private mortgage
insurance (PMI) if you put down less than 20 percent of the purchase
price when you buy.
lenders, in years past, learned the hard way that some homeowners
may not care about losing their homes. In some cases, where homes
were total losses, homeowners with little financial stake in the
property and insufficient insurance coverage simply walked away
from the problem and left the lender with the financial mess.
PMI typically adds several hundred dollars annually to the cost
of your loan, it protects the lender financially if you default.
You can also expect worse loan terms such as higher up-front fees
and/or a higher ongoing interest rate on a mortgage when you make
a down payment of less than 20 percent.
is not a permanent cost. Your need for PMI vanishes when you can
prove that you have at least 20 percent equity (home value minus
loan balance outstanding) in the property. The 20 percent can
come from loan paydown, appreciation, improvements that enhance
the value of the property, or any combination thereof. Note also
that, to remove PMI, most mortgage lenders require that an appraisal
be done -- at your expense.
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