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Private mortgage insurance is an insurance that first time home buyers purchase, often because it is a requirement that the lender places on their qualifying for the loan. It is not for all home buyers. It is offered to those buyers who do not have the down payment percentage of the loan that the lender wants. As a rule, a lender wants the applicant to put down 20% of the purchase price. When the borrower does not have that much to invest in the home, private mortgage insurance is an option.

Private mortgage insurance probably seems an expensive and unnecessary expense that is added to the cost of acquiring a home. However, there are benefits to having the insurance. Number one, it allows the borrower without the 20% down payment to apply and obtain a home loan. This will take years off your dream of owning your own home. You will not have to spend years saving your money to accumulate the 20% down payment. With the option of private mortgage insurance, you can make a smaller percentage down and begin home ownership sooner. If you are young and/or in a lower income bracket, you will still have the same opportunity to borrow as older, higher income individuals.

Private mortgage insurance protects the lender when you are not able to fulfill your payment obligations. That is why many lenders require the borrower to purchase the insurance when the down payment is less than 20%. Some lenders have a higher or lower percentage, but the industry standard down payment percentage is generally 20%. The price of the policy and payments differ depending on the lender. The industry standard is 1% of the mortgage amount per year. For example, if you are requesting a loan of $250,000 then you multiply the total loan amount by 1%. $250,000 X .01 = $2,500.

You can figure this quickly without using a calculator, if you understand that the amount is about $1,000 for every $100,000.

As you can see, this insurance can add quite a bit to your monthly mortgage payment. It is beneficial, but somewhat expensive. Be sure to speak with several lenders before choosing this option. One way to avoid this expense is a piggyback loan, also called 80/20 loan.

When you only owe 78% of the home’s value on the note, your lender will cancel your private mortgage insurance. The mortgage lender is required to do this, but they will check your payment history and verify the balance remaining to insure that you only owe 78% of the home’s value. If your history indicates that you are high risk, then the lender is not required to cancel your private mortgage insurance. The lender can require you to remain covered with the policy until you have paid another 1% of the value of your home. It will take you anywhere from 10 to 15 years of a 30 years note to arrive at the percentage required. During that time you must be sure to make your payments on time, be current on the loan, and not have a history of being more than 30 days late on any of your payments to stay out of the high risk category. You may be able to arrive at the required percentage earlier than the anticipate 10 to 15 years if the prices of homes in your area, and your home in particular, has increased in value over time.