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Buying a home is a big investment and you may be asked by the lender to carry insurance on the mortgage. ‘Do I have to pay mortgage insurance?’ No, you do not have to carry this coverage if you pay 20% of the value of the home in the down payment. However, if you do not have this percentage to put down on the home, the lender will require to you carry the insurance as a condition of the loan. The cost of private mortgage insurance (PMI) is about .5% of the total amount financed. The premium will be calculated as part of the monthly payment that you make to the lender. Even without the 20% down payment, there are ways to keep from paying this insurance premium.

Private mortgage insurance is insurance that covers the lender’s loss when the buyer defaults on the loan. When the buyer can no longer make the mortgage payment and the home goes into foreclosure, the lender can apply to the insurance for payment of the balance due. The cost of the insurance depends on the amount that you borrow. The annual premium will be .5% of the total amount financed and will be divided into 12 monthly payments. This can increase your monthly payment by $50.00 or more.

There are several mortgage programs that a buyer without 20% down can qualify for. The Federal Housing Administration (FHA) is a government backed program that encourages home ownership by decreasing the down payment requirements to 3.5% of the property value. There are loans that will finance 80% of the value and the remaining 10-20% can be financed separately to make the down payment. If you find that you cannot avoid paying PMI you can limit the length of time that you have the coverage.

If you live in an area that property values have increased or you have done extensive remodeling and the value of your home is higher than your purchase price, you may want to have the property appraised and send the lender a copy of the appraisal. If you have 20% equity in the home because of the increase in value you can request that the lender drop the insurance requirement. The Homeowners Protection Act allows a lender to cancel the coverage automatically when the borrower has paid in 20% equity in the property. Mark the date on your amortization schedule and ask the lender to drop the insurance requirement.

You can now avoid paying PMI if you qualify for a loan that helps you meet the down payment requirements of your lender. If not, you can ask for cancellation of the insurance when you have 20% equity in the home. ‘Do I have to pay mortgage insurance?’ yes, until you meet these criteria.