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Mortgage Insurance Gets Cheaper for Home Buyers

It seems like everything has to be insured, whether you need it or not, but private mortgage insurance (PMI) is one of those costs that home buyers just love to pay. Finally, relief is in sight from Fannie Mae, the secondary mortgage lender.

Forty percent of home buyers pay PMI, according to the Mortgage Bankers Association of America. PMI applies to people who buy a home with less than 20 percent down. Ironically, it doesn't insure you for anything--it simply protects the lender in case you default. Although it does encourage lenders to finance loans for up to 95% of the sale price, you end up paying for it in your monthly mortgage payments. If you want to know how much it costs, take a look at your escrow statement.

Fortunately, Fannie Mae recently announced it will substantially reduce the costs of PMI on the loans it purchases in the secondary market. Freddie Mac has indicated it will follow suit. How does that effect home buyers? When they get a loan, chances are their loan provider will sell it almost immediately to Fannie Mae or Freddie Mac. In order for mortgage companies to sell loans to Fannie Mae and Freddie Mac, they must follow their guidelines, so they charge borrowers what the PMI guidelines require.

Now Fannie Mae is reducing the costs of PMI by $110 to $130 per month. That's good news, especially for first-time home buyers who can't afford 20 percent down and get charged for PMI. Who's eligible? Home buyers with good credit who take out a 30-year, fixed-rate loan. You can reduce your PMI premiums even further by paying an extra fee at closing that varies between $375-$750. Or you can pay a slightly higher interest rate, about .08 to .15 percent more. But think carefully before choosing a higher interest rate in a vain attempt to save more on your PMI. Depending on the size of your loan, you'll almost certainly end up paying more in interest than you'll save in PMI costs.