What is Mortgage Insurance?
Loading ...While mortgage insurance may sound like it’s a form of insurance protection for home buyers, it’s really protection for the lender. Mortgage insurance, also called private mortgage insurance or PMI, ensures that a lender will get all of their money back should a buyer stop paying back their mortgage. Unfortunately, it’s the buyer not the lender that has to pay for this insurance. Generally, if the down payment you make on your home is less than 20% of the sale price, you’ll be required to get mortgage insurance. The exact cost of mortgage insurance varies on the size of the loan and the down payment, but it usually does not cost over one percent of the loan. It’s typically paid for like other forms of insurance, with a monthly payment, although some lenders may allow you to entirely pay for it at closing. As a home buyer, you’ve got enough fees and taxes to pay for, which is why most people do whatever they can to avoid paying for mortgage insurance.
How can I Avoid Mortgage Insurance?
There are usually two ways you can avoid paying for mortgage insurance. At least one of the two should work for you if you cannot afford to pay 20% of the down payment.
- Depending on your lender, you may be able to avoid paying for mortgage insurance if you accept a higher interest rate on the loan. How much of a higher interest rate may depend on the loan amount and the down payment, but it can be as high as a full percentage point. Now many home buyers would cringe at having a higher interest rate but keep in mind that mortgage interest is tax deductible, while mortgage insurance premiums are not.
- Your other option for avoiding mortgage insurance involves actually getting two mortgage loans. Generally, you get one loan that covers most of the home, such as 85% of it, and then you get another for 5% and pay the other 10% in your down payment. Your smaller loan at 5% will have a higher interest rate, but you should be able to pay it off very quickly. Even though you’ll be paying a higher interest on 5% of the mortgage, your monthly payments on the two loans will be less expensive than your monthly payments on one loan with mortgage insurance.
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