YOU ASK:

Is the 20% down on a home for mortgage insurance (PMI) based on the appraisal value, or purchase price?

WE ANSWER:

It can either be the purchase price or the appraisal value whichever is smaller.

For instance, if the appraisal value of your home is $200,000 but the purchase price is $180,000, then you will need $36,000 as down payment if you want to do away with private mortgage insurance. On the other hand, if you bought the house at $150,000 but the appraisal value for it at the time you bought the house was $120,000, then you will need $24,000 to meet the 20% down payment requirement.

This 20% requirement on the down payment at the time of closing (or if you already are on the process of paying your mortgage and are being covered by mortgage insurance) was instituted to ensure that the borrower has enough money sunk into the house that it is harder for him to walk away from the mortgage and start defaulting on the loan.

The mortgage insurance, then, serves as a guarantee for borrowers who are not as attractive a credit risk, than those who can afford to pay 20% in down payments or who already has 20% worth of equity. Again, the basis for computing this would be the lower of the appraisal value or the purchase price.

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