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Explaining Mortgage Insurance

Q. Can you explain mortgage insurance?

A. Mortgage insurance, sometimes referred to as private mortgage insurance or PMI, protects lenders against borrowers who default on their loans.

Any borrower who puts down less than 20 percent on a mortgage should expect to pay mortgage insurance, which is often paid on a monthly basis with other escrowed funds such as property tax and homeowners insurance.

Homeowners can sometimes have mortgage insurance dropped once they’ve reached a certain level of equity in their properties, typically around 78 percent loan-to-original value ratio. In some cases, however, like Federal Housing Administration-backed mortgages closed with 3.5 percent down, mortgage insurance is in place for the life of the loan.

Don’t neglect to weigh the impact of mortgage insurance on your budget when looking for a home. There are many benefits to making a large down payment, and avoiding mortgage insurance is definitely one of them.

Another? The likelihood of getting a low interest rate.

– Deborah Imondi, vice president, AAA Northeast Bank

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