Mortgage insurance

Mortgage insurance is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new homes value. In other words, buyers with less than a 20 percent down payment are normally required to pay Private Mortgage Insurance (PMI).

With most conforming lenders private mortgage insurance (PMI) is required on loan amounts that are higher than 80% Loan to Value. There are non-conforming or sub-prime lenders that will lend up to 125% Loan to Value without mortgage insurance, but the rates with these lenders are generally higher. Another way to avoid having to pay PMI is to split your loan up in two mortgages with an 80% first and a 20% second mortgage.

FHA loans and some first-time buyer programs still require mortgage insurance regardless of the LTV

Mortgage insurance can benefit many home buyers. It allows them to become homeowners sooner, and it help increases their buying power. First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

Some loans require MIP. Some loans don't. When comparing the loans make sure to look at more then just the rate. Not having to pay MIP can be a large enough benefit to take a higher rate. It all comes down to the numbers.

You can avoid PMI by taking out a second mortgage that covers anything over the 80% of the first mortgage. You must calculate typical appreciation in your area to determine if this will be worth it as a second mortgage will have a higher rate than the first and you may be stuck paying this for 5-10 years but if you have extremely high appreciation you may be able to get rid of the PMI after just 12 months and a new appraisal from the lender.