A:

Private mortgage insurance (PMI) is an insurance policy that protects lenders from the risk of default and foreclosure, and allows buyers who cannot make a significant down payment (or those who choose not to) to obtain conventional mortgage financing at affordable rates. If you purchase a home and put down less than 20%, your lender will probably minimize its risk by requiring you to buy insurance from a PMI company prior to signing off on the loan. The cost you pay for PMI varies depending on the size of the down payment and loan, but typically runs about 0.5 to 1% of the loan.

There are three different types of private mortgage insurance:

Single Premium PMI - With this type of PMI, you pay the mortgage insurance premium upfront in a single lump sum, eliminating the need for a monthly PMI payment. The single premium can be paid in full at closing or financed into the mortgage.

Lender-Paid PMI (LPMI) - With LPMI, the cost of the PMI is included in the mortgage interest rate for the life of the loan. This can make a lower monthly mortgage payment, but you may end up paying more in interest over the life of the loan. Unlike monthly PMI, you cannot cancel LPMI because it is a permanent part of the loan (through the higher interest rate).

Borrower-Paid PMI (BPMI) - If you have a monthly PMI, you make a premium payment every month until your PMI is either terminated (when your loan balance is scheduled to reach 78% of the original value of your home); when it is canceled at your request because your equity in the home reaches 20% of the purchase price or appraised value (your lender will approve a PMI cancelation only if you have adequate equity and have a good payment history); or when you reach the midpoint of the amortization period (a 30-year loan, for example, would reach the midpoint after 15 years).

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