Purchasing a new home – especially for young families – can be difficult even with private mortgage insurance (PMI), but having such insurance strategies in place allows people to purchase homes even when they can’t afford a sizeable down payment.
Private mortgage insurance is required for approximately 10% of those who seek mortgages every year and is usually required by the mortgage company if you can’t afford at least a 20% down payment on your home.
Who Needs Private Mortgage Insurance?
Private mortgage insurance isn’t required for everyone, but according to bankrate.com, approximately 1.5 million Americans had it in 2005.
Your mortgage company assures its investment in you by requiring private mortgage insurance, which usually runs between $60 and $150 per month in addition to your mortgage payments.
You can read your mortgage agreement to find out how long you have to carry it.
How Large of a Down Payment Do I Need to Avoid Private Mortgage Insurance?
Most mortgage companies only require private mortgage insurance if you put less than 20% down on your home.
Statistics have shown that people who put less than 20% down are more likely to default on their mortgage, so rest assured that this number wasn’t pulled out of thin air.
Although 20% is the norm, however, you might get away without private mortgage insurance if you put a little bit less. It depends on the mortgage company.
How Can I Shop Around for the Best Private Mortgage Insurance Rate?
You can’t. Your mortgage company works with one of the eight insurance companies nationwide that provide private mortgage insurance, and they will sign you up with that provider’s service.
The good news is that most private mortgage insurance is about the same price per month; the bad news is that you don’t get a say in the matter.
Why is Private Mortgage Insurance Necessary?
The mortgage company uses private mortgage insurance to pay for the loan if you default.
In other words, if you fail to make your monthly mortgage payments, the insurance company will reimburse the mortgage lender for their loss. Because so many homeowners default on their mortgages, this is a necessary insurance policy for the mortgage company.
When Can I Drop My Private Mortgage Insurance?
That all depends. Some mortgage lenders will allow you to drop private mortgage insurance as soon as you have 20% equity in your home (i.e. you’ve paid off 20% of the loan).
Others, however, require that you hold the private mortgage insurance for a specific number of years.
Check with your mortgage company to find out if you are still required to carry private mortgage insurance, and if not, how you should go about dropping it.
What’s the Catch?
Most people don’t even realize that they can cancel their private mortgage insurance at a certain time.
When you close on a house, you are inundated with paperwork, and you might not read everything as closely as you should.
The Private Mortgage Insurance Act (which went into effect in 1999) says that homeowners have the right to cancel their insurance once they’ve met the requirements set forth by the mortgage lender.
Don’t be taken advantage of, and make sure that you’ve read all the paperwork carefully.
There’s no reason to pay an extra bill every month if you’ve met the necessary requirements.