Mortgage insurance is often a necessary expense that borrowers must incur if they don't have the standard 20 percent down payment amount. Mortgage lenders will require a private mortgage insurance (PMI) policy as a part of the approval conditions. Choosing to pay the insurance yourself or opting to allow the lender to pay it depends on your financial needs and how long you intend to stay in the home.
PMI is a policy intended to protect the lender against financial loss if you default on your loan payments. Even though the lender can try to sell your property through foreclosure, the house isn't guaranteed to sell for as much as you owe on it. Although both borrower-paid and lender-paid options exist, ultimately you pay for the policy although you receive no benefit from it. If the requested loan amount is greater than 80 percent of the home's appraised value, the lender will require insurance coverage.
Borrower-Paid Mortgage Insurance
If you elect to pay the mortgage insurance, the lender charges a yearly premium paid in monthly installments. On average, the premium costs between 0.3 and 1.15 percent of the total loan amount. For example, if your mortgage loan's total is $150,000, the yearly premium at 0.7 percent would equal $1,050 yearly or $87.50 per month. Lenders determine the rate based on the total loan amount and the down payment amount.
Some lenders might be willing to pay the mortgage insurance premiums for you; however, it will still cost you. In exchange for covering the PMI, the lender charges you a slightly higher interest rate on your mortgage loan. The increased interest rate carries on through the entire life of the loan. However, since the cost of your mortgage interest is tax-deductible, the higher interest rate equals a larger deduction. The lender-paid option isn't available on government loans -- only on conventional loans.
Lender-paid PMI cannot be cancelled at any time. To eliminate it, you have to refinance the loan. However, borrower-paid PMI can be cancelled by law. You have the option to request cancellation after you've paid down the loan balance to below 80 percent of the original loan-to-value ratio. At your loan's closing, you should be provided with a statement that shows you how many payments it will take to reach the 80 percent threshold. Once the balance reaches 78 percent, the lender is required to cancel the PMI.
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