Mortgage Glossary
Private Mortgage Insurance (PMI)
Private mortgage insurance is a monthly premium required on conventional loans when the borrower puts less than 20 percent down. PMI protects the lender, not the borrower, in case of default. The cost typically ranges from 0.5 to 1.5 percent of the loan amount annually, added to your monthly payment. PMI can be removed once you reach 20 percent equity in your home, either through payments or appreciation, by contacting your lender to request cancellation.
Related Terms
Down Payment
The down payment is the upfront cash you pay toward the purchase price of a home, with the remainder covered by your mortgage. Down payment requirements vary by loan type: conventional loans may require as little as 3 percent, FHA loans require 3.5 percent, and VA and USDA loans offer zero down payment options. Putting at least 20 percent down on a conventional loan allows you to avoid private mortgage insurance. A larger down payment also reduces your loan amount, resulting in lower monthly payments.
Loan-to-Value Ratio (LTV)
Loan-to-value ratio is the amount of your mortgage divided by the appraised value of the property, expressed as a percentage. For example, if you borrow $320,000 on a home appraised at $400,000, your LTV is 80 percent. LTV is a key factor in mortgage approval and pricing. A lower LTV typically means better rates and the ability to avoid mortgage insurance, while a higher LTV indicates more risk for the lender.
Equity
Home equity is the difference between your home's current market value and the amount you still owe on your mortgage. As you make payments and your home appreciates in value, your equity grows. Equity can be accessed through a cash-out refinance or home equity loan, and it serves as a key measure of your financial stake in the property. Building equity is one of the primary wealth-building benefits of homeownership.
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