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Private Mortgage Insurance or PMI
A type of coverage that some conventional loans require borrowers to have if they can't make a down payment of at least 20 percent. PMI protects the lender in case the borrower defaults on the loan. The cost of PMI varies depending on the size of the down payment and the loan amount, but typically ranges from 0.3 percent to 1.5 percent of the original loan amount per year. For example, if you took out a $200,000 loan with a 1 percent PMI rate, you would pay $2,000 per year in PMI premiums. While PMI may seem like an added expense, it can make homeownership possible for people who can't afford a large down payment upfront. It's important to note that PMI does not protect the borrower in any way and is only beneficial to the lender. Once the borrower has paid off enough of the loan to reach 80 percent loan-to-value, they can request to have the PMI removed. Overall, if you're considering a conventional loan with less than 20 percent down, make sure to factor in the cost of PMI when budgeting for your mortgage payments.
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