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Private Mortgage Insurance (PMI)
Insurance required when the down payment is less than 20%, protecting the lender against borrower default.
Definition
Private Mortgage Insurance is a policy that protects the lender (not the borrower) in case of default on a loan with less than 20% down payment. PMI is common in conventional residential lending and adds a monthly cost of roughly 0.5-1.5% of the loan amount annually. Once the borrower reaches 20% equity, PMI can typically be removed. PMI is more common on owner-occupied loans — most investment property loans require a minimum 20-25% down payment, which avoids PMI entirely. For investors, PMI is most relevant when house hacking with FHA or conventional owner-occupied financing.
Related Terms
LTV (Loan-to-Value)
The ratio of a loan amount to the appraised value of the property.
Equity
The difference between a property's market value and the outstanding mortgage balance.
House Hacking
Living in one unit of a multifamily property while renting out the other units to cover the mortgage.
Closing Costs
Fees and expenses paid at the closing of a real estate transaction beyond the purchase price.
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