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private mortgage insurance (PMI) - a form of insurance developed to protect lenders who offer high loan-to-value ratio mortgage loans. Loans exceeding an 80% loan-to-value ratio may require PMI. For example, if Bank A agrees to make Abel a $190,000 loan on a $200,000 property, it will contact a PMI company and arrange insurance for the first 20% of the purchase price or value ($40,000). The PMI company will charge Abel a monthly premium and possibly a setup fee for the insurance. In the event of a default by Abel, the PMI company will pay the lender up to $40,000 to cover any losses. In essence, PMI acts as a substitute for borrower equity, and the lender is able to offer a 95% loan on nearly the same basis as an 80% loan. This insurance may be terminated when the loan-to-value ratio exceeds 80%, either through appreciation in value or by principal reduction of the loan.
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© 2004 Bella Vista Publishing Company, Inc. ISBN 0-9718225-0-6
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