Most lenders feel that borrowers who make low down payments (and therefore have little equity in the property) are more likely to default on a mortgage loan.

As a result, they generally require you to purchase private mortgage insurance (PMI) if you are borrowing more than 80 percent of the value of the home you are purchasing (i.e., your down payment (link) is less than 20 percent). PMI guarantees that your lender will be paid if you default on your mortgage.

Tip: Some mortgages (e.g., VA loans) do not require PMI.

How much does it cost?

PMI premiums vary depending on the insurance company, but they are usually based on factors such as the type of mortgage loan, the loan amount, and the amount of down payment you are making.

Although PMI can be expensive, you may be unable to qualify for a mortgage without it. Contact us (link) to get exact costs based on your financing plans.

Can you cancel it?

If you are concerned about taking on PMI payments, keep in mind that you may not have to pay PMI forever. If you have a good payment history and reach 20 percent equity in your home, you can petition your lender to remove the PMI. For loans that originated after July 29, 1999, your lender is obligated to remove PMI once you have reached 22 percent equity in your home (78% loan-to-value), provided you have a good payment history.

Are there any alternatives?

One alternative to PMI is to obtain 80-10-10 financing, where a lender provides a traditional 80 percent first mortgage, and you then obtain a 10 percent second mortgage and make a 10 percent down payment. Since your first mortgage is not over 80%, PMI is not required.

Another alternative may be to increase your mortgage interest rate rather than require monthly PMI. Keep in mind that with this arrangement, you’ll pay more interest for the life of the loan. In contrast, you can generally remove PMI once you obtain a certain amount of equity in your home.

Discuss these options and details with us. We can help you determine your best options.