Homebuyers who cannot put 20% down on their new homes will have to pay private mortgage insurance. In the past this was frowned upon, but many financial advisors are now realizing that many consumers will never be able to afford to put 20% down on their homes. For this reason, private mortgage insurance is now being viewed as a tool that borrowers can use to be able to afford the homes they need.
Private mortgage insurance is an insurance policy purchased by the lender to protect itself from the possibility of default. If you as the borrower were to default on the loan, mortgage insurance would pay back a portion of the loan’s value to the lender. However, the lender is going to charge you for this insurance, making your total monthly payment amount increase.
Why is private mortgage insurance charged only on homes that have more than 80% loan to value ratios? If you were to find that you could not pay your home mortgage and your lender had to foreclose, your lender would likely get around 80% of the home’s value when the home was resold. For this reason, private mortgage insurance is only charged on homes that the lender would lose money on if they went into foreclosure. Also, when the value of the loan drops below 78%, the private mortgage insurance is dropped.
If you do not want to pay private mortgage insurance, you will need to put 20% or more down as a down payment for your home. If this is not possible, consider shopping for a combo loan. This type of mortgage is actually two mortgages, one for 80% of the value of the home, and the other for the remaining portion that you need. These loans are difficult to find, however, so you might be stuck paying private mortgage insurance for a few years until your home has enough equity for the charge to disappear.
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