Gone are the days where a 20% down payment is the standard requirement to purchase a home. In fact, with some loans like the NC Home Advantage Mortgage™, you can purchase your home with as little as 3% down! However, as you may know, if you purchase a home with a down payment of less than 20%, you will likely have to pay mortgage insurance. Learn the ins and outs of mortgage insurance below so you can make the best financial decision for your home purchase.
What is Mortgage Insurance?
Mortgage insurance is an insurance policy paid by the homeowner that protects the lender against default on your home. The Federal Housing Administration can provide mortgage insurance, or the insurance can be purchased through a private company. When insurance is provided through a private entity, it is referred to as private mortgage insurance (PMI).
What Does Mortgage Insurance Cost?
The cost of mortgage insurance largely depends on the amount of the mortgage loan. In general, insurance typically costs from .5% to 1% of the loan amount annually. For example, if you purchase a home with a loan of $150,000, your mortgage insurance could be up to $1,500 per year. Usually, mortgage insurance is paid in monthly installments as a part of your total monthly mortgage payment.
Do I Have to Pay It Forever?
Luckily, borrowers only have to pay mortgage insurance until their loan has made it to the 20% equity mark in most cases. In addition, your lender may require that you pay mortgage insurance for a certain amount of time, usually a period of a few years. Once you have reached the agreed upon equity in your home and surpassed the time requirements, your lender can remove the mortgage insurance, leaving you with more money in your pocket every month.
How Can I Avoid Mortgage Insurance?
Unfortunately, mortgage insurance is required by almost all lenders if a borrower places a down payment of less than 20%. If you need to have mortgage insurance on your loan, you can minimize the time that you have to pay it by making accelerated mortgage payments. This means paying extra toward the principal balance of your mortgage to get your equity in your home up to 20% as soon as possible. Check with your lender to ensure that this is possible with your loan type, and speak with them about accelerated payments to get mortgage insurance removed from your loan as soon as possible.
A great way to avoid mortgage insurance altogether, or at least minimize your time paying it, is to up your down payment. If your down payment could use a boost, learn more about the NC Home Advantage Mortgage™ with down payment assistance at www.nchfa.com/home-buyers.
