The Decision on Down Payments and Mortgage Insurance

An enormous hurdle to purchasing a home for many home buyers is having an adequate down payment of 20% or more. To offset that, lenders allow borrowers to to buy mortgage insurance which lets them come in with less than the standard 20% down payment.

What is private mortgage insurance? (PMI)
PMI is insurance is to aid the mortgage lender's when a mortgage loan transaction is over 80% of it's appraised value. The lender is taking on more risk of the borrower defaulting on the loan with a low down payment, so they require the borrower to purchase private mortgage insurance.

If the borrower stops making payments on their , private mortgage insurance is triggered to pay the lender's portion of the principal balance due.

For example, if you brings in just a down 10% payment to buy a home, private mortgage insurance may insure the outstanding 15%.

The fee for private mortgage insurance is dependent on the type of mortgage loan, the loan size, your down payment and credit score. Typically, the normal price can range from 0.5% to more than 1.0% of the loan amount,  divided by 12 and included in your monthly mortgage payment.

Is there a point when I can cancel private mortgage insurance?
As soon as the balance of your mortgage is below 80% of the current market value of your home you are able to usually request the cancellation of private mortgage insurance. Most of the time there are other stipulations, such as making payments on time and not having a junior lien.

By and large, mortgage lenders should cancel PMI the moment your mortgage debt falls to less than 78% of it's market value. They won't know that unless an appraisal has been reviewed or some will accept the tax assessor's value.

You're in Charge of the Down Payment
A lot of people can become homeowners who otherwise might not be able to without the help of mortgage insurance. However, consider the real costs of putting down as little as possible. 

Most industry experts and homeowners can agree that the larger the down payment, the better your financing deal will be. You'll obtain a lower mortgage interest rate under 80% loan-to-value than you would at 90%. Sometimes it's as much as 2.5% lower when it's a jumbo loan. 4.00% vs. 6.50% is a huge difference for a home in Orange County and especially California. Additionally, you will pay much less in fees.

In the end, it's a question of balancing your finances with the house, your future savings and earnings potential to figure out the best long-term strategy for you.