When you buy a home, you may be required to have mortgage insurance. If your down payment is less than 20 percent of the home price, your lender will require this additional coverage. The cost of private mortgage insurance, or PMI, is included in your monthly mortgage payment. Depending on the market and your financing options, you may be able to avoid paying this extra premium.
Mortgage Insurance Defined
Mortgage insurance is coverage that a lender requires for a borrower who makes a relatively small down payment. This borrower has little equity in the property at the time of purchase. This insurance protects the lender in case the borrower defaults on the loan. Because of this insurance, a prospective home buyer can afford to purchase a home without making a considerable down payment.
Cost of Mortgage Insurance
The cost of mortgage insurance is based on the amount you borrow. Lenders generally charge between one-half of one percent and one percent of the loan amount. It’s calculated as an annual premium and divided by 12 for a monthly cost, which is included in your mortgage payment. If you buy a home for $200,000 and put down 10 percent, or $20,000, the balance of $180,000 is multiplied by .005 to arrive at the cost of mortgage insurance. The result, $900, is divided by 12 for a monthly cost of $75.
With creative financing, you may be able to avoid paying mortgage insurance. If you only want to put 10 percent down, you can do an 80/10/10 mortgage. You can obtain a first mortgage for 80 percent of the home price, and obtain a second mortgage for 10 percent of the price. Your 10 percent down payment makes up the balance of the transaction.
Increase in Home Value
If your home value has increased, either due to market changes or home improvements, you may be able to cancel mortgage insurance. You may have to provide documentation, such as an appraisal or evidence of home improvements, to prove your property value has increased. If you are able to supply proof that your home’s loan-to-value (LTV) ratio is less than 80 percent, your lender may cancel PMI.
The Homeowners Protection Act states that mortgage insurance must be automatically cancelled when LTV reaches 78 percent. This is calculated on the home’s price when purchased. A borrower can send a written request to cancel PMI when the loan has reached 80 percent LTV.
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