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Private mortgage insurance (PMI) exists to protect the lender when a borrower has low equity in the property — typically when the down payment is below a commonly used threshold (e.g., 20% in many lending frameworks). Because a small down payment increases the lender’s risk that the borrower may default and the house might not sell for enough to cover the loan, PMI shifts some of that risk away from the lender by providing insurance that pays if the lender suffers a loss. PMI is usually a temporary added monthly cost and can often be removed when the borrower’s equity reaches an agreed threshold through payments or home-price appreciation.

From a borrower’s perspective, PMI is a cost of buying with a smaller down payment: it enables purchase sooner but raises monthly housing expense. Compare the cost of PMI to the cost of waiting and saving a larger down payment — sometimes paying PMI for a limited time is cheaper than delaying homeownership. Different loan programs have different PMI rules and cancellation triggers; monitor equity progress and talk to the servicer about how to remove PMI once you reach the required equity level. Also, shop different loan products and lenders because PMI structures and premiums vary; in some cases lender-paid mortgage insurance (LPMI) shifts costs differently, so read the loan disclosures carefully to understand who pays what and how it affects monthly cash flow.

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By Quiz Coins

Small, regular extra payments on loans can substantially shorten payoff time and save a large amount of interest.

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