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Private Mortgage Insurance: The Good, the Bad, and Good Riddance

Essentially, private mortgage insurance (PMI) is an insurance policy issued by private companies that insures mortgages against default. You might say it’s similar to Lloyds of London insuring a BMW holein- one prize in a golf tournament. Chances are that the players won’t even come close to the lucky hole, but occasionally it does happen.

However, private mortgage insurance makes it possible for home buyers to purchase homes with zero to 20 percent down, and this is a big chunk of the nearly 65 percent of American households that currently own their own home. With more than 20 percent down, lenders don’t require PMI.

The insurance world is all about risk. If buyers put 20 percent or more down on a home, statistics show that the chances of their skipping out on the mortgage shrink considerably. It’s the zero to 20 percent down crowd that keeps investors up at night, so they require an insurance policy that covers them if the buyers don’t make the monthly payments.

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