When you're figuring out how much of a down payment you can afford to put down on your new home, don't forget to factor in the cost of mortgage insurance. Most lenders require that you take out a mortgage insurance policy -- which repays a portion of your loan if you default -- if you put down less than 20 percent of your home's price. Knowing your lender's minimum requirement and making a large enough down payment can help you avoid mortgage insurance, which typically costs about 2 percent of your total loan amount.
FHA Loan Requirements
Loans guaranteed by the Federal Housing Administration, which are usually geared toward first-time homebuyers, require two types of mortgage insurance: an upfront payment and an ongoing annual payment. The FHA requires annual mortgage insurance payments until your remaining loan balance is less than 78 percent of your home's value and you've made on-time payments for the last five years, whichever is later. If your mortgage term is 15 years or less, you're required to maintain mortgage insurance only until your loan balance reaches 78 percent, regardless of how long that takes.
Private Loan Requirements
Private banks and other lending institutions can set their own guidelines and cutoff points for mortgage insurance. According to the Washington State Office of the Insurance Commissioner, most private lenders require mortgage insurance if your down payment is less than 20 percent of the cost of the home. Some lenders do not require mortgage insurance at all but compensate for their increased risk through higher interest rates.
VA Loan Requirements
Loans administered by the U.S. Department of Veterans Affairs do not require that you make mortgage insurance payments or a down payment. Military veterans, active-duty military members and the spouses of veterans who died in the line of duty are eligible for VA loans.
You do not usually have to carry mortgage insurance for the full life of your mortgage. Each lender has a set cutoff point related to either the appraised value of your home or the amount of mortgage principal remaining. Once you make enough payments to reach this point, you can cancel your mortgage insurance policy. In most cases, your lender is required to notify you regarding when and how you can cancel your policy. Some policies cancel automatically once you pay down enough of the loan.
Since the Homeowners Protection Act passed in 1999, you are legally entitled to request a cancellation of your mortgage insurance from a private lender once the principal mortgage balance is less than 80 percent of your home's value. Your lender can still require mortgage insurance after this point if you made any late payments.