If you’re thinking about buying your first home, or any new home for that matter, you’ve probably already though about the fact that you’ll need homeowners insurance. In fact, many websites that give you a mortgage calculator will ask you how much your homeowners insurance will cost so that they can roll that amount into the estimated monthly mortgage payment. But there’s another type of insurance you may need, too: private mortgage insurance.
What, you may be asking, is private mortgage insurance? Well, this is a type of insurance that insures your lending company will not lose the principle value of your home if you stop making payments. Clearly you’re not buying a home and planning on not making payments, but the lending business, just like the insurance business, is about assessing risks, and your lender may see you as a risky investment.
The main thing that determines whether or not you’ll have to have private mortgage insurance is your lender. Some lenders may require that you carry this insurance if you’ve put less than 20% down on your home loan. This means that if you’re buying a $150,000 home and you’re putting less than $30,000 of your own money into it right off the bat, you’ll probably have to buy private mortgage insurance.
This insurance is basically there so that the lending company knows they’ll get the principle of your loan back if you simply walk away. You might think it never happens, but statistically, people who invest less than 20% in their homes are much more likely to simply stop paying the mortgage payments and to allow the bank to foreclose. For this reason, most lending companies will force you to pay private mortgage insurance, which will pay them the principle of your loan if you let the bank foreclose on your home.
So, if you’re planning to buy a home with less than a 20% down payment, there are a few things to consider. First off, know that private mortgage insurance can add quite a bit onto your yearly mortgage payments; a $200,000 home is likely to draw a PMI payment of $75 a month or more. Also, know that it will probably take you a while to get to that 20% ownership mark after which you’ll be able to cancel your private mortgage insurance policy. This is because of the laws of amortization; in the first few years you’re paying off your home, your mortgage payments will actually be paying more interest than principle, and in order to cancel your PMI coverage, you have to have paid for 20% of the value of your home in principle.
One way to avoid paying for private mortgage insurance is to put a bigger down payment on your home. If you only have $20,000 saved, then don’t buy a house that costs more than $100,000, and if you want a bigger home, take a few more months or years to save cash to put down on a more expensive home. Also, you can check out special government-backed loans through the FHA. You can often get one of these loans with a 10% down payment, and since the government guarantees them, you don’t have to have private mortgage insurance.
If you can get a government loan, though, and can’t put the 20% down on your dream home, then you might just have to bite the bullet and pay for PMI. However, keep close track of your loan’s principle, and as soon as you’ve paid off 20% of your house, request that your bank check