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Understanding Private Mortgage Insurance in New Hampshire

By Tabitha Naylor

Lending requirements in New Hampshire are similar to most other states. One of the important things to understand about buying a home in New Hampshire, or any other state is what private mortgage insurance (PMI) is, who it protects, and how it's applied. This article will outline the basic information you need to know about private mortgage insurance, loan requirements, ways to avoid paying private mortgage insurance and how you can find the best rates on private mortgage insurance.

What is Private Mortgage Insurance?

Private mortgage insurance is an insurance policy provided by private mortgage insurers. This type of extra insurance is required for all loans where the loan-to-value ratio is greater than 80%. When you apply for a mortgage, the lender wants to make certain your home will have enough equity to pay off the loan balance in the event you default and the property goes into foreclosure. Because foreclosed homes are sold at discounted rates, the lender generally requires a buffer of at least 20%. The PMI insurance partially reimburses the lender but generally does not fully cover their losses.

Exceptions to this rule are mortgage loans insured and covered by FHA, VA, or RD guarantees. These loans have their own "built-in" mortgage insurance but the rates and the way the insurance is handled differs from private mortgage insurance. Once a homeowner reaches 80% equity in their home they can request the private mortgage insurance be canceled. Lenders are now required to tell the buyer how many years and months it will take for them to pay down 20% of the principal mortgage amount to cancel the PMI insurance at the time of closing. In loans made to high risk borrowers lenders can continue to require PMI insurance until 50% of the equity is reached so it is very important for borrowers to understand if they will b required to carry private mortgage insurance, and if so, for how long.

How Can I Avoid Paying Mortgage Insurance?

Mortgage insurance is quite expensive. Typically it costs between 0.5% to 1% of the entire loan amount on an annual basis. So, that means on a loan of $200,000 dollars you may end up paying as much as $2,000 a year which is a substantial amount in addition to your mortgage payment, home insurance, utilities etc. It can mean at least another $200 or more a month.

There are ways to avoid PMI insurance. The best way is to save enough money to be able to make a 20% down payment. You should also keep on top of the current market value of your home since your loan to value ration is based on your homes value. If your home is appreciating quickly, you can have it reappraised and send the new appraisal to the lender if it brings down the LTV ratio to 80% or less. With the new valuation the lender should release you from having to continue the PMI.

If that is not possible, it may be possible to do a piggyback loan where you take out a primary mortgage for 80% of the home value and a second loan for 10% and pay 10% as a down payment. In this case, the loan interest on both loans is deductible and you would not be required to purchase and pay for PMI insurance.

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