Can You Use a Cosigner Instead of Mortgage Insurance?

by Leigh Thompson, Demand Media
    Mortgage insurance pays the lender if the borrower defaults on the loan.

    Mortgage insurance pays the lender if the borrower defaults on the loan.

    Buying a house can bring joy and happiness to young couples who just tied the knot. However, if you don't have very much of a down payment, you may have to pay private mortgage insurance. PMI may significantly raise your monthly mortgage payment. Unfortunately, the only way to get around PMI is to make a higher down payment.

    What Is Private Mortgage Insurance?

    Private mortgage insurance insures your mortgage against default. Your PMI company pays your mortgage holder the difference between your down payment up to 20 percent of the total cost of the home to cover the loss should you default on the home. PMI gives your lender the assurance that it will recover money on higher-risk mortgage loans.

    Factors Requiring Mortgage Insurance

    PMI comes into play in your mortgage loan when the total mortgage amount exceeds 80 percent of the cost of the home. Borrowers who cannot pay at least 20 percent of the mortgage as a down payment must automatically enroll in a PMI program. Your lender requires this to issue the mortgage to you. Having a cosigner does not remove the automatic enrollment for PMI. You need to pay at least 20 percent down or you get PMI. Cosigners do offer other benefits when it comes to mortgage insurance, however.

    Factors Affecting Your Monthly Premium

    The deciding factors on how much PMI costs depend on your down payment amount and your credit rating. The more you put down on the house, the less you pay in PMI premiums. Your PMI rate also is influenced by your credit score. Young couples with poor credit may benefit by having a cosigner by getting a lower rate on their PMI premiums, which in turn lowers their monthly payments.

    How to Avoid Mortgage Insurance

    Using a cosigner does not let you avoid mortgage insurance because the criteria for mortgage insurance is not based on credit. Other methods do exist for getting out of paying mortgage insurance. Pay more than 20 percent down to immediately avoid PMI. The other option consists of splitting your mortgage in an 80-10-10 method. You put 10 percent down, get a mortgage for 80 percent of the home and get a private loan for the other 10 percent. You pay a higher interest rate on the second loan but it may cost less than PMI.

    About the Author

    Leigh Thompson began writing in 2007 and specializes in creating content for websites. She has been published online in various capacities. Thompson has an associate degree in information technology from the University of Kansas and is working on a bachelor's degree in business and personal finance.

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