If you don’t own 20% or more equity in your home, you probably will be required to purchase mortgage insurance as part of the package. Mortgage insurance usually costs between 0.5% to 1.15% of the value of your full loan every year.
So if your loan for your home is $100,000 for example, the total due each year would be about $1,000. Per month that isn’t so bad (about $83.33).
Is the house you’re looking at buying actually $100,000 though? Probably not. Remember that if your home is four or five times that, the cost of your mortgage insurance bill will be as well.
Many homeowners are saddled with $200 or more in mortgage insurance every month on top of their mortgage bill. Lots of new homeowners forget to even factor this into their monthly finances and then find themselves struggling to make ends meet after they purchase their new home.
Mortgage insurance is a major cost outlay and should be treated as part of the cost of your mortgage if you cannot furnish enough to purchase 20% of the home up front.
The good news is that sometimes mortgage insurance is tax deductible. Sometimes it isn’t though, so you’ll want to find out what your exact situation is before you decide to commit to this system. You may also be able to pay the cost of your mortgage insurance up front in full as one bulk payment. This earns you a discount. Of course, odds are that if you can’t afford to purchase 20% of the home up front, you can’t afford this, either.
If it’s not a question of affordability but mere convenience, however, you might want to think about doing this as a sort of compromise between buying 20% equity up front or purchasing the minimum equity (or putting zero down payment on the home).
Another note of caution regarding mortgage insurance is that many lenders won’t let you drop the mortgage insurance even after you finally pass the 20% threshold in equity. They may require you to then keep the mortgage insurance for a certain time period, usually a number of years. This is one more term to ask about when you decide to sign up. You should also find out what you need to do if you do want to cancel your mortgage insurance. Usually this entails sending in a letter of some sort, not just stopping payments.
If you can’t pay the 20% down payment, you may want to just consider a less expensive home; the lower the total cost of your loan, the lower your monthly mortgage insurance payments will be. The less you pay in mortgage insurance each month, the more money you can ultimately put toward paying off your loan and meeting the equity threshold.
Consider all of your options carefully before choosing any particular plan, especially if you only plan to live in the home for a short time. Mortgage insurance payments are money you’ll never see again.