It’s largely known that a 20% down payment is the standard when purchasing a home. Because the risk for the lender is generally only the difference between the home value and the sum due on the loan, the 20% adds a nice cushion against the costs of foreclosure, reselling the home, and regular value changes in the event a borrower is unable to pay.
During the recent mortgage upturn of the last decade, it was widespread to see lenders taking down payments of 10, 5 or often 0 percent. A lender is able to manage the increased risk of the small down payment with Private Mortgage Insurance or PMI. This supplementary plan protects the lender if a borrower doesn’t pay on the loan and the market price of the property is less than what is owed on the loan.
Since the $40-$50 a month per 100,000 borrowed is compiled into the mortgage payment and generally isn’t even tax deductible, PMI can be pricey to a borrower. Different from a piggyback loan where the lender consumes all the damages, PMI is beneficial for the lender because they collect the money, and they get the money if the borrower is unable to pay.
