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.
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.
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.
More buyers get PMI
About 37 percent of those who bought a home in the last 10 years were required to pay for mortgage insurance, according to TD Bank's survey. Of those who bought in the last two years, 43 percent paid for mortgage insurance. The study surveyed more than 2,000 buyers.
"PMI has had a definitive impact on many homebuyers – including making them rethink or delay the purchase of a home in light of not being able to meet monthly mortgage payments," said Michael Copley, executive vice president of retail lending at TD Bank.
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 mortgage insurance.
Mortgage insurance on FHA loans
For those who have to rely on mortgages insured by the Federal Housing Administration -- called FHA loans -- it's complicated. 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 a FHA mortgage insurance is to refinance the loan.
FHA insurance is generally more expensive than insurance on conventional private mortgages.
Get discount on FHA mortgage insurance
But the FHA recently announced that it will reduce premiums for buyers who get housing counseling. If you plan to get an FHA loan, make sure to ask your lender about the program. It's known as HAWK, which stands for Homeowners Armed With Knowledge.
Buyers in the program would pay an insurance upfront fee of 1.25 percent of the total of their loan, instead of 1.75 percent. The annual mortgage insurance fee would be reduced to 1.25 percent from 1.35 percent.
For someone getting a $200,000 mortgage that would mean $1,000 in savings in upfront costs, and a monthly insurance premium of $208 instead of $225.
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