If you're a home buyer, avoid private mortgage insurance like a plague.
Private mortgage insurance is an insurance policy that protects mortgage lenders against losses that result from you defaulting on a home mortgage, dies, or is otherwise unable to meet the contractual obligation of the mortgage.
It is usually required from mortgage borrower if their down payment is less than 20 percent
That’s right, you pay the insurance to protect your bank.
Private mortgage insurance may come with a typical “pay-as-you-go” premium payment, or it may be capitalized into a lump sum payment at the time of mortgage origination.
As an alternative to private mortgage insurance, some lenders may offer a “piggyback” second mortgage, which serves as or part of the down payment to avoid private mortgage insurance.
This option may be marketed as being cheaper for the borrower, but that doesn’t necessarily is true. Always compare the total cost before making a final decision.
Another alternative is “lender-paid insurance”, which sounds so much more reasonable. With lender-paid insurance, you are required to put down at least 10 percent as down payment.
That’s still a lot better than you paying for private mortgage insurance, which can add up to a lot of money, which could have been use to pay down the principal.
Not every lenders offer lender-paid insurance, so you have to shop around and ask, especially mortgage brokers. You can always get better deals from mortgage brokers than big banks.
Once you’ve paid off some of your loan and/or your equity in your property has increased to where your loan is less than 80% of your property value, you may be eligible to cancel your mortgage insurance. Once the mortgage insurance is cancelled, you will stop paying the monthly premium, which you can now use that as additional payment to the principal and pay off your mortgage a little bit faster.
Related article: Pay Off Your Mortgage in 7 Years
The private mortgage insurance does not cancelled automatically when your loans reaches less than 80% of your property’s value. You have to initiate the cancellation. So check your mortgage and property tax assessment value at least yearly.
Related article: Don’t waste your money on mortgage life insurance