What's the Deal with Private Mortgage Insurance?

You're finally ready to buy a house. You like your job, you know where you'll be for the next five years or so, and your salary can cover the mortgage, leaving you enough left over at the end of the month to have a little fun. The only problem is you haven’t quite saved enough for a 20 percent down payment. So do you just say goodbye to the idea of owning a home?

Before you sign that rental agreement on your apartment, consider all your options.

Pay Private Mortgage Insurance (PMI).

Your down payment assures your lender you’ll be able to make your monthly payments. Without that money, your lender’s going to need another form of insurance. And for most lenders private mortgage insurance is a good option. Most mortgage lenders require PMI if you put down less than 20 percent of the selling price of your new house.

So how does it work? You pay a monthly fee, typically 0.005 percent of your loan. Then the insurance company promises to pay your lender if you default. PMI protects the lender, not you. That’s why some people aren’t too crazy about the idea. Luckily, there are other options. 

Wait until you've saved more for a down payment.

No one likes to wait. But with a good savings plan you might be able to make up the rest of your down payment pretty quickly. And who knows? A new job or a good raise might speed up the process. 

Pay a higher interest rate.

Some lenders are willing to lend to you at a higher interest rate to make up for your smaller down payment. You’ll end up paying more in interest over time. But your interest is tax deductible and your PMI isn’t. If you go with this option, keep an eye on current mortgage rates, and know when it might be time to refinance. You might also improve your debt to income ratio, your credit rating, or your length of employment to qualify for a better rate.

Consider a piggyback mortgage.

Think you're ready for one mortgage? How about two? Piggyback mortgages got a bad rap during the latest housing crash. But depending on your situation, they might be right for you. With a piggyback mortgage, you’re still taking out the traditional 80 percent mortgage loan. But you’re also taking out a second, smaller loan to make up the difference between the money you have and the down payment you need. The interest rate on your second mortgage is probably going to be high. But if your payments on both loans are lower than mortgage insurance, it might be a good option. 

As excited as you are about buying a home for the first time, remember that there will (probably) always be houses to buy. It'll be hard to enjoy your new place if you're in over your head, so carefully consider your options before you sign on the dotted line. 

Read more → How Much House Can I Afford? Like, Really.