Home buyers should understand the costs that they will be responsible for when they purchase a home, with a mortgage loan. One of these expenses that might be a part of the mortgage payment is mortgage insurance. What is mortgage insurance? Private mortgage insurance (PMI) is a type of insurance that protects the lender if you can’t pay the mortgage loan. The cost of mortgage insurance is included in your mortgage payment for various loan types. Generally if you put less than 20% down on a home loan, most loan types will require you to purchase PMI. The mortgage insurance will be in addition to the principal (P), interest (I), taxes (T) and insurance (I), that are a part of your monthly payment. The mortgage insurance makes it possible to purchase a home without putting 20% down.
Cost of mortgage insurance
On average you can expect to pay approximately 1% to 3% of the purchase price. The amount depends on the type of loan you are getting and other factors. Your premiums for PMI will depend on the following factors:
Whether your interest rate is fixed or adjustable.
The length of the term of your loan.
Your loan to value. (LTV)
Your credit score.
Your home’s value.
Other risk factors that are determined by your lender.
Mortgage insurance covers the lender, not you. It is an expense that you want to avoid if you possibly can. Here are some things that you can do to avoid PMI! The first thing that you can do is put 20% down or at least one fifth of the home’s purchase price. Another option to avoid PMI is to take out a first loan and a second loan on the home that you are purchasing. In this situation the first mortgage for the home is 80% of your contract price. The second mortgage makes up the additional 10% of the contract price. The last 10% is the down payment. Because your first mortgage is 80% you will not need to pay PMI. Make sure that you compare the total cost of a loan with PMI and the option of the first and second mortgage before making a final decision.
If your loan requires mortgage insurance it is important to cancel the mortgage insurance as soon as possible. Monitor your home’s value and your mortgage balance. Once the value of your home loan falls below 80% of the home’e value, contact your lender to find out what needs to be done to remove PMI. Removing PMI might require an appraisal or refinance, but it is more than likely worth the money savings each month.