Home Ownership and Mortgage Insurance

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The following is a guest post contributed by Genworth Financial. Enjoy!

Home Ownership and Mortgage Insurance

Many homebuyers going through the mortgage acquisition process for the first time are slightly surprised at the various costs that they encounter (and have to pay) that are not actually included in the loan principal or interest itself. For example, there are often one-time costs such as origination fees and mortgage points, but, there is also a monthly fee that must also be paid for something called ‘private mortgage insurance.’

Private mortgage insurance (or as it is often abbreviated, PMI) protects the home loan lender in the event of a loan default. Essentially, it acts as a form of protection for the lender if the home buyer gets in to trouble and can no longer pay their mortgage. 

Some Often-Forgotten Benefits of Private Mortgage Insurance

I know, I know. At first glance, this coverage called private mortgage insurance might seem like nothing more than yet another monthly fee that you have to pay on top of all of the other fees you’re already paying as a home owner. However, the bottom line of the matter is that at the end of the day, the bank is the one lending you the money to buy your house, and therefore, you must play by their rules. 

As such, for the many individuals looking to obtain traditional loans from banks to buy a house, it’s good to know some of the benefits provided by having private mortgage insurance. I’ve listed a few of these below:

  • Lower interest rates / monthly payments:
    • As we’ve discussed previously on My Personal Finance Journey, your rate of return depends upon the amount of risk you’re willing to take on. From the perspective of a bank, this is no different. If the bank is going to be exposed to more risk, they are going to demand a higher return from you in the form of a higher interest rate. 
    • Thus, it makes sense that having this type of insurance to shelter the lender will save you some money. 
  • Lower down payments:
    • Without mortgage insurance, the lender requires that you put down more than 20% of the home’s value up front. 
    • If you’re buying a $200,000 house, this adds up to $40,000. Do you think most people have that type of money?
  • Mortgage insurance is tax deductible:
    • This is something I didn’t know before researching for this post! PMI is tax-deductible, right along with your interest payments on your home loan.
  • Job Loss Protection:
    • Many mortgage insurance providers these days are offering programs to work with you during periods where you are temporarily unemployed to help you keep up with your monthly home payments. 

For the majority of regular home-buyers, I imagine that private mortgage insurance will be required in order for them to purchase a home, especially since it’s rare for people these days to have cash reserves equivalent to 20% of a home’s value.

However, if you decide that mortgage insurance is not suited for your personal needs, it’s also good to know of ways to obtain a home loan that do not require PMI. Some of these methods are discussed below:

Putting Down a Large Down Payment

Private mortgage insurance is required on most loans made by banks and financial institutions. That is because most borrowers fail to put down a significant down payment. You can avoid paying private mortgage insurance altogether by putting down a large enough down payment. 

Putting down at least 20% of the home’s value in the form of a down payment will eliminate the need for you to buy private mortgage insurance.

Getting a Special Loan

If you are a former veteran that served in the armed forces, you can skip getting mortgage insurance altogether. The Veterans Administration offers loan programs that do not require you to purchase mortgage insurance. VA loans give borrowers the best of both worlds. You can get a low interest rate VA loan and put down a minimal amount of money to purchase a home. 

You can also qualify for special federal loan programs due to your occupation that will take care of any mortgage insurance for you. Doctors, nurses, and teachers are eligible for these programs in many states because of the demand for the professions.

Have the Seller Pay Your PMI

Mortgage trends in the real estate market show that this is clearly a buyers market. You can use this to your advantage by negotiating favorable terms in your real estate contract. You can get the seller to pay your private mortgage insurance for you by adding it into the seller paid closing costs. You can add in an extra 3 to 5 percent to cover the amount that your mortgage insurance will cost you over the first few years of your loan. This way you get PMI insurance and do not have to pay for it at all.

How about you all? If you’ve gone through the home-buying and home-loan acquisition process, did you have to pay for private mortgage insurance on your home loan? If not, how did you avoid paying this fee? 

Do you think a 20% down-payment is too high of a level to pay in order to avoid paying private mortgage insurance?

Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

  • @ Special federal loan programs based on your occupation – 
    • I admit that I wasn’t aware of any of these special programs that you could use if you have a certain occupation to avoid paying private mortgage insurance. 
    • Does anyone else have any experience using these?
    • Additionally, I have heard of some companies helping secure favorable mortgage terms with employees that move for a job change. These people usually can secure a pretty sweet deal too! It’s possible that in these cases, the company could in some way help with paying the mortgage insurance. 
  • @ Getting the seller to help you out with paying private mortgage insurance – 
    • This is truly an amazingly opportunistic idea! Kudos for coming up with it!
    • It really is hard to imagine that just several years ago, houses were being bought and sold like crazy and now, 4-5 years later, sellers are SO DESPERATE to sell/find buyers that they’ll even bend as far as paying mortgage insurance for the potential buyer. 
    • However, as a buyer, it is my personal opinion that you have an obligation to use all of the tactics at your disposal to try to get the best deal for yourself and your family! Therefore, this strategy of getting the seller to potentially pay for your PMI is worth a shot at the very least!
    • It also reminds me of how ALMOST EVERYTHING in the home-buying/selling process is negotiable – inspection fee, home repairs before sale, real estate agent fees, closing fees, ALL OF IT! And, it never hurts to at least ask if the seller or buyer is willing to cover certain non-traditional costs if you have the “upper-hand” in the transaction process.

***Photo courtesy of http://farm6.static.flickr.com/5014/5547563982_d4d6bedafe.jpg


  1. As a first time home buyer and a young couple with limited resources here are my experiences.

    1.I got a condo in 2008 at @6% 30 yrs. fixed.
    2. About six months ago I refinanced it for @ 3.25 % for a 5 1/2 year ARM .
    3.My monthly mortgage payment went down by about $175 dollars.
    4.I am planning on paying the original monthly payment + an extra payment every year.(One extra payments amounts paying off mortgage 5 years in advance on a 30 yrs. mortgage)
    5.In 5 years I should have paid the 20% and refinance and avoid the PMI .

    To do all this you would need a fairly good credit, which I think is not so difficult if you follow some simple rules.
    My advice to young buyers is to get a mortgage with monthly mortgage payments that are about 15%-17% of your monthly paycheck (the standard is about 25%).

    Just my 2 cents

    • That's definitely great advice Sameer! I agree with young buyers being better off buying a house they can easily afford instead of the maximum that they'll give you. I think 40% of your income is the most expensive house they'll give you!

      Question – on your ARM, after the 5.5 years, what does the interest rate become?
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  2. I think a 20% down payment is too little!! The U.S. is one of the only countries in the world where you can buy real estate with less than 10-15% down and that is NOT a good thing. See Sub-prime mortgage crisis: Easy credit + low interest rates + inflated home prices = housing crash

    My view is that Loan-to-values (LTVs) over 80-85% are not wise…
    My recent post Your Mind, The Only Way To Build Real Wealth and Happiness

    • You make a good point here Neo! I'm curious – in other countries, what do they typically require as the down payment?
      My recent post Opening and Managing a Self-Employed Individual / Solo 401(k)

  3. thefrugallery says:

    Another thing to consider is that if you already have the mortgage you can have the property reassessed to try to get the PMI dropped. If you've made significant improvements to the property or prices in your area have increased, you would need to pay to get the property reassessed. If the value comes in at 20% more than what your mortgage is for, you can ask the bank to drop the PMI. Doesn't work for everyone, but it worked for me!
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    • That's a good thing to keep in mind FrugalGallery!

      I'm curious – do you know how the property value assessments done by the local govt in calculating property tax compare to ones done by assessment professionals?
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  4. My goal is to pay off all of my hospital bills by April. It's alot of money. But, I am really scrimping to make it work.__2dogs5catscrew@att.net

  5. These are some great tips. Thankfully, I do not have to worry about a mortgage right now or in the near future. Renting is the way to go. Great article.
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    • Thanks for reading Jon! Renting definitely has its benefits, but I got tired of my rent being increased every year and broke down and bought a condo when I started grad school.
      My recent post Opening and Managing a Self-Employed Individual / Solo 401(k)

  6. I'd hate to have to give PMI as a concession. Imagine paying PMI on a house twice. Ouch.

  7. Kevin Mzansi says:

    Wow! I never knew PMI actually had benefits for the homebuyer, other than making their pockets lighter…Nice job on highlighting these things!

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