Frequently, homebuyers with down payments of less than 20 percent forget about a major expense that adds to their monthly mortgage payments: private mortgage insurance. Or PMI or simply MI as it’s also known
More than three in five people who bought a home in the past 10 years ended up with higher-than-expected monthly mortgage payments because of private mortgage insurance premiums, according to a recent survey by TD Bank. Of those who bought in the last two years, 43 percent paid for mortgage insurance.
That is why it is so important that when you’re quoted a monthly mortgage payment you confirm if it includes the mortgage insurance premium also
Generally, borrowers who cannot make a 20 percent down payment are required to pay for mortgage insurance. The insurance protects lenders in case the borrower defaults on the loan. The premium is included in the borrower’s monthly mortgage payments.
Mortgage insurance premiums vary depending on the size of the loan, the credit of the borrower and the down payment. As you gain equity or pay down your mortgage, there are ways to get rid of the mortgage insurance
For those who have FHA loans, FHA requires borrowers to pay for mortgage insurance for the life of the loan, regardless of how much equity is gained over time. The only way to get rid of FHA mortgage insurance is to refinance to a conventional loan.
If you are starting with a conventional loan, you might also have “MI” depending on your down payment but it will be less than a FHA loan and will drop off after you gain that 20% in equity