It’s hard to imagine here in Lancaster, PA, where we are facing a new Winter Weather Advisory, but we’re less than 2 months away from spring, ushering us into home-buying season. The snow melts away, the lawns are a little greener and house hunting goes into full effect.
Whether you’re buying your first home. upgrading to your forever home, or down-sizing due to an empty nest, it’s customary to have a down payment of 20% of the final purchase price of your home. But when 20% is not do-able, there is a way you can still get the home of your dreams. You will however, need to carry mortgage insurance to cover the smaller down payment. Here is some additional information on how mortgage insurance works.
When You Need Mortgage Insurance
Essentially mortgage insurance is necessary when your down payment is less than 20% because it protects your mortgage lender if you default, or are unable to repay the mortgage. If you take advantage of a FHA or VA loan, your mortgage insurance will be issued by the government. For traditional loans mortgage insurance is supplied privately and is referred to as Private Mortgage Insurance (PMI).
How to Avoid Mortgage Insurance
The only sure-fire way to avoid mortgage insurance is to make a 20% down payment on when purchasing your new home.
Mortgage insurance can easily tack an extra $30-$70 for every $100,000 borrowed to your mortgage payment each month. The cost of mortgage insurance varies and is dependent on several factors, including the amount of your down payment and your credit score. Generally, the lower your down payment and the lower your credit score. the higher your mortgage insurance premium will be.
Normally, you pay mortgage insurance until the loan-to-value (LTV) of your mortgage loan equals 80%. The LTV is simply the amount of money you borrow divided by the cost of the property you bought. You request cancellation of the mortgage insurance coverage when you build up 20% equity in home (for example, you’ve paid 20% of the principal for every $100,000 borrowed.)
So while the lure of low-to-zero down payment home buying seems appealing, you’ll want to consider how the addition of mortgage insurance factors into the attractiveness of that deal.
If we can answer any questions you have on how mortgage insurance works when purchasing a new home, please contact us by email or contact our staff at 800-995-6685.