Mortgage and home equity lenders are likely to require you to purchase private mortgage insurance ( PMI), if your down payment is less than 20% of your home's purchase price. Private mortgage insurance protects the lender in case the home buyer is unable to pay off the mortgage. Private mortgage insurance may let you buy a house that you couldn't afford if you had to put down 20% of the purchase price. Lenders may also require PMI for home equity loans if your equity in the home is less than 20%.
With a traditional mortgage, banks usually required home buyers to put down at least 20% of the home's purchase price. Now you can usually find mortgages that require a down payment of only 5%. The lender purchases -- and you pay for -- insurance to protect themselves if you can't repay your loan. Your PMI premiums are usually added to your regular mortgage payment.
Many mortgage and home equity lenders allow you to cancel the private mortgage insurance when you have paid off enough principal so that you have 20% equity in your home. By law, the lender must cancel your PMI when you reach 22% equity (with some exceptions, like you are behind on your payments). Canceling your private mortgage insurance payments can save you hundreds of dollars every year. Mortgages from the Federal Housing Administration and the Veterans Administration are exempt from automatically Canceling your PMI. Those loans frequently require you to pay for private mortgage insurance for the life of the loan). The Federal Trade Commission has more information about Canceling PMI here.
When you're shopping for a mortgage or home equity loan, you don't have many much room to negotiate for private mortgage insurance with a particular lender. Since the lender is buying the insurance for themselves (with your money), they get to pick what they want. Of course, shopping around for your mortgage may find that some lenders require smaller premiums for PMI. Some lenders offer mortgages where they don't require you to insure them up to 20% of the purchase price. These will have lower PMI payments, but are likely to have higher interest rates. Check with your financial advisor -- interest paid on your mortgage is likely to be tax deductible, while PMI payments are not.
You may also be able to save money on private mortgage insurance with the type of mortgage you choose. PMI premiums are often less expensive for a fixed rate mortgage than they are for an adjustable rate mortgage. Your private mortgage insurance premiums also depend upon the amount of your mortgage or home equity loan and the amount of your down payment or existing equity.
Private mortgage insurance should not be confused with homeowner's insurance. Homeowner's insurance protects the home owner against loss or damage to the home or property. Every policy is different, but homeowners frequently take insurance against fire, theft, flood or against someone suing them when they get hurt on the property. PMI protects the mortgage lender against the home owner not paying back the loan.
If you're looking for a mortgage or home equity loan we have a list of lenders that offer free, no-obligation mortgage and home equity loan quotes online here.