When purchasing a home, you might be surprised at the many monthly fees associated with your mortgage. In addition to paying your monthly payment, you will also have to pay homeowners insurance and property taxes. Depending on your financing, you may also have to pay private mortgage insurance. Usually all these costs are paid together to your lender in a monthly payment.
What Is Private Mortgage Insurance?
Private mortgage insurance, which is also known as lenders mortgage insurance, protects the lender in the event that you default on your loan and the lender is unable to recoup the costs after foreclosure and sale of the home. You will have to pay mortgage insurance if your loan-to-value (LTV) is more than 80 percent. This means if your down payment is less than 20 percent of the purchase price you will have to pay private mortgage insurance. You can choose whether to pay private mortgage insurance up-front in one lump sum or break it up and pay it every month along with your mortgage payment.
How to Get Rid of Mortgage Insurance
Your lender is required to cancel your private mortgage insurance once you reach an LTV rate of 78 percent. Therefore, the length of time you will have to pay mortgage insurance will depend on how much your down payment was, the cost of your house and whether or not you make extra mortgage payments. Once your LTV rate reaches 80 percent, you can request to have the private mortgage insurance canceled.
There are ways to improve your LTV rate besides by just paying down your mortgage. These include doing home improvements or remodeling projects to increase the value of your home. If the housing market improves, your house value goes up, which, in turn, lowers your LTV rate. If your LTV rate reaches 78 percent due to any of these factors, your private mortgage insurance will be canceled.
Alternatives to Paying Private Mortgage Insurance
Just because you don’t have a down payment of 20 percent doesn’t mean you will be stuck paying private mortgage insurance; there are other options. Some lenders will allow you to forego paying private mortgage insurance in exchange for you paying a higher interest rate. Another option is an 80/10/10 program. Under this program you would have two loans; the primary loan would have an LTV rate of 80 percent. You would have a second mortgage with an LTV rate of 10 percent. With this scenario you would be required to make a 10 percent down payment. A similar choice is an 80/15/5 loan; this requires 80 percent LTV with the first mortgage, 15 percent LTV with the second mortgage, and a 5 percent down payment.
How to Decide Which Option Is Right for You
With so many options, it can be difficult to decide which option is best for you and your financial situation. Usually, if you can make a 20 percent down payment that is your best option, unless you will be left with no money in your account. If you cannot make a 20 percent down payment, you need to look carefully at the other options. While there is no private mortgage insurance with either an 80/10/10 or 80/15/5 option, you will have to pay loan costs for both the first and second mortgages. It would be wise to compare the total long term costs of each option (including loan costs, interest rates and private mortgage insurance costs) before deciding which option is best for you.
Figuring out financing for your home purchase can be an overwhelming and stressful process. However, by educating yourself on the options and weighing your financial situation in relation to each option, you can be confident that you are making the best possible choice for you. If you choose to have private mortgage insurance, be sure to pay down your mortgage so you can cancel your mortgage insurance an save money.