Whether you're a seasoned homeowner or looking to close on the purchase of your first residence, the prospect of buying a new home leads to plenty of important considerations. One of the most crucial of these is mortgage insurance. If you're obtaining a privately issued mortgage and don't qualify for FHA assistance or other federal housing subsidies, chances are good that you'll need to take out a private mortgage insurance policy. Before you dive into the treacherous waters of the mortgage insurance market, familiarize yourself with your options.
What Is Private Mortgage Insurance?
Private mortgage insurance is an alternative to government-backed policies like those issued by Fannie Mae, Freddie Mac and the FHA. Generally speaking, mortgage lenders require borrowers who make down payments of 20 percent or less to obtain some form of mortgage insurance. This isn't a legal requirement, but it has gradually evolved into a standard practice throughout the mortgage industry. In any event, "private mortgage insurance" describes any form of mortgage insurance that's underwritten by a for-profit or nonprofit entity that doesn't receive direct funding from state or federal government agencies.
Key Distinctions with Public Counterparts
A private mortgage insurance policy usually carries a higher premium than an equivalent public policy. This is largely due to the fact that public policies are designed to subsidize homeownership for buyers who might otherwise be unable to afford to buy their own homes. However, public and private mortgage insurance policies adhere to very similar structures. Once you take out your policy, the distinction will be more or less meaningless.
Requirements and Cost
If you can't make a down payment that's equivalent to 20 percent of the value of your home, your mortgage lender will almost certainly require you to obtain mortgage insurance. If you have solid credit, you should be able to avoid the mortgage insurance requirement simply by making a down payment of 21 percent or more. If you have poor or spotty credit, this might not be enough: Mortgage lenders have been known to require mortgage insurance for buyers who put down up to 50 percent of their home's total value. Unfortunately, it's hard to make generalizations about "acceptable" down payments. Lenders tend to make judgments about mortgage insurance on a case-by-case basis.
It's also hard to generalize on the issue of cost. Most private mortgage insurance issuers will examine your credit profile and history as a homeowner before agreeing to a specific premium structure. Whereas borrowers with spotless histories can expect to pay premiums of as little as $30 per month for every $100,000 that they borrow, borrowers with shakier credit might be asked to pay $70 or more per month for the same amount of coverage.
Avoiding Private Mortgage Insurance Premiums from the Start
To avoid liability for mortgage insurance premiums, make it your goal to save at least 20 percent of the target value of your new home. If your lender still requires you to obtain mortgage insurance after making a down payment of more than 20 percent, you may be able to wiggle out of the demand by securing a reappraisal that lowers the home's total value. Otherwise, you may have to obtain mortgage insurance at the outset and take steps to slough off your responsibility as soon as possible.
Canceling or Minimizing Private Mortgage Insurance Mid-Loan
Fortunately, you can take several steps to minimize or eliminate your private mortgage insurance outlays shortly after closing on the purchase of your new home. First, you can secure a reappraisal that lowers your loan-to-value ratio at any time. While this isn't a surefire way to avoid paying mortgage insurance, it could shorten your policy's active period and reduce the total cost to you. Alternatively, you can call your insurance underwriter and ask for a reevaluation of your policy. In many cases, this will lead to its cancellation.
