Home buyers are typically expected to provide 20 percent of a home’s selling price as a down payment. For those who can’t afford a 20 percent down payment, mortgage insurance exists as an alternative. Read on to learn more about mortgage insurance.
Saving a down payment
A home is likely the most expensive purchase you’ll ever make. Luckily, you don’t have to front all the money yourself—you can qualify for a mortgage from a lender. Saving the standard 20 percent down payment helps convince lenders that a homebuyer has the diligence and resources to see the loan’s terms through. For most people, saving even 20 percent of a home’s purchase price can be a tall order and usually involves considerable financial planning. For those who can’t swing it, there’s another way: private mortgage insurance.
What is mortgage insurance?
Private mortgage insurance helps prospective homebuyers who might not otherwise qualify for a loan. Most forms of insurance include paying monthly premiums to insure oneself against potential loss. Mortgage insurance is different—you pay the premiums, but the lender is insured up to a certain amount should you miss payments on your mortgage.
Deciding whether you need mortgage insurance
If you don't have a 20 percent down payment saved, private mortgage insurance could make your new home a reality. Just be prepared to pay a premium on your PMI policy. The type of PMI policy you get determines the long-term costs of your premium. For example, with a “declining renewal” PMI, your premium will decrease yearly as your equity increases. In comparison, “constant renewal” PMI policies are determined by your original loan amount and remain fixed for the first 10 years.
The good news? Once you gain 20 percent equity in your home, you can ask to have your PMI removed. But lenders aren’t required to let you know when you’ve reached this milestone, so remember to keep track of what you've paid on your loan and request a PMI cancellation once you qualify.
Not all mortgages require a 20 percent down payment. For example, government-assisted programs from the Federal Housing Administration, US Department of Agriculture and Veterans Affairs offer mortgages to qualified applicants for less than 5 percent down. These programs also carry mortgage insurance but remain substantially more affordable than private mortgage insurance.
Is mortgage insurance right for you?
So, is mortgage insurance worth it? Securing a mortgage without mortgage insurance is ideal. But if mortgage insurance helps you get a home loan with a rate you can afford, it may be right for you. Just remember to consider those premiums and track the equity you’ve built in your home so you can one day drop your PMI policy.
