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Private mortgage insurance typically required when down payment is under 20%
PMI is mandatory on many conventional purchase loans with less than 20% down, and it can also be required during refinancing if equity stays below 20%.
Private mortgage insurance, or PMI, is insurance that protects the lender if a borrower stops making payments on a home loan. According to Yahoo Finance, if a buyer puts less than 20% down on a conventional loan, PMI is generally required, either paid at closing or built into monthly mortgage payments.
PMI applies to conventional loans, including certain refinancing cases. Yahoo Finance notes that lenders may require PMI when refinancing with a conventional loan if the borrower’s equity in the home is below 20%.
The cost and structure of PMI are arranged through private insurance companies, and lenders typically disclose the expense on documents such as the loan estimate and closing disclosure. Yahoo Finance also says PMI is designed to benefit the lender, not the borrower, by helping the lender recoup some funds after a default, even though it does not shield borrowers from late payment penalties or foreclosure.
PMI does not apply to government-backed loans like those guaranteed by FHA, USDA, or VA. Instead, borrowers use other forms of mortgage insurance, such as upfront and monthly mortgage insurance premiums on FHA loans, which Yahoo Finance says generally remain for the life of the loan when the down payment was under 10%.