Buying a home is a huge financial commitment, and for most people, realizing their dreams of home ownership requires a mortgage. Depending on the size of your mortgage down payment, your lender may request that you take out some private mortgage insurance (PMI) in case you default on your payments. Many providers offer suitable mortgage insurance products, and with so many choices, it pays to shop around using an online mortgage insurance calculator to find a product that meets your requirements and offers the right premiums. Bear in mind that PMI insurance isn’t necessary in some cases because it depends on your type of mortgage loan and the size of your down payment. You may be in a position where PMI is necessary to continue with your home purchase, or you may decide to take out the insurance as a way of purposefully reducing your initial down payment.
What Is Mortgage Insurance?
Most mortgage lenders expect a 20% down payment for a home loan. It’s possible to reduce the size of this down payment by purchasing mortgage insurance, which protects the lender in the event you default on the loan.
What Is Private Mortgage Insurance?
The primary purpose of PMI is to protect the lender, although it does benefit many low-income families and first-time buyers who aren’t in a position to pay a 20% down payment. While your initial down payment is less, you pay more for your home in the long term because you must pay the premiums for the insurance. If you default on your mortgage, your lender is the sole beneficiary. There are three main types of PMI:
- Single premium PMI: You pay the insurance premium upfront in a lump sum
- Lender-paid PMI: The lender includes the cost of the insurance in the mortgage interest rate for the life of the mortgage
- Borrower-paid PMI: You make regular premium payments until the termination of the insurance
PMI has the potential to significantly lower your initial down payment. Take the time to compare mortgage rates from various companies to get a good deal.
Insurance and finance options are available through the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). The FHA insures mortgages obtained through its approved lenders and could reduce a down payment to as little as 3.5% of the purchase price of a home. The VA offers purchase loans with competitive interest rates that let you purchase a home without requiring a down payment or PMI as long as you serve, or served, in the Armed Forces and meet all of the eligibility requirements.
Mortgage Insurance Premium
While PMI is an insurance policy used to protect lenders of a conventional home loan, mortgage insurance premium (MIP) is an insurance policy exclusively for FHA loans with which the down payment is less than 20%. The FHA calculates an upfront MIP or calculates an annual MIP each year, payable in 12 installments. An online mortgage calculator with taxes and insurance options makes it easier to get an idea of what your monthly premiums and mortgage repayments may come to based on your level of borrowing, term and down payment size.
How Much Is Mortgage Insurance?
The price of mortgage protection insurance depends on several factors. The amount of money you borrow is an important factor, and if you pay a larger down payment, it reduces the amount of private mortgage insurance you require and lowers the total amount you borrow. Shop around for competitive mortgage insurance rates, and consider all of your financial options carefully.
Compare Mortgage Insurance Providers
Don’t accept the first offer you get. Many companies offer mortgage insurance, so research the options and consider factors such as the company’s financial strength.
Genworth Mortgage Insurance
Genworth Financial offers a range of mortgage insurance products. It has flexible options for borrower-paid and lender-paid mortgage insurance, plus affordable housing schemes for low-to-moderate-income borrowers. The company has a rating of BB+ with Standard & Poor’s.
FHA Mortgage Insurance
The FHA provides mortgage insurance on loans from FHA-approved lenders throughout the United States. It’s the only government agency that operates on its own self-generated income and is the largest insurer of mortgages in the world, having insured over 34 million properties since 1934.
Radian Mortgage Insurance
Radian aims to “stabilize the foundation of the American dream” with mortgage insurance that dramatically decreases the size of your down payment. In some cases the down payment is as low as 3%. The company has a rating of BBB- with Standard & Poor’s.
Arch Mortgage Insurance
Arch Mortgage Insurance provides global insurance solutions out of Bermuda, Europe and the United States. The company has a rating of A+ with Standard & Poor’s.
How to Get Rid of Mortgage Insurance
If you’re up to date with your payments and you’ve reached the point where the principal balance of your mortgage has fallen to 80% of the original value of your home, you’re in a position to request cancellation of PMI.
If you don’t request a cancellation, your lender must terminate your PMI when the principal balance reaches 78% of the original value of your home, or if you reach the midpoint of your loan’s amortization schedule, whichever happens first. Because most loans last for 30 years, it’s uncommon for PMI to continue after 15 years.
These rules don’t apply to loans backed by the FHA or VA, and neither do they apply to lender-paid PMI, which runs for the lifetime of the loan.
When you’re deciding how to choose the right mortgage for you, the first question you need to ask yourself is, how much home can you afford? If you have the financial resources to pay a full 20% down payment on the home you want, it may be a wise course of action because you sidestep private mortgage insurance, which saves you money in the long term. If you have your heart set on a house but the down payment is beyond your current means, a conventional loan with PMI, or an FHA-insured loan, may be the answer to getting the keys to your dream home. Talk to your lender and financial advisor to discuss your options and find an arrangement that works for you.