Conventional mortgage loans require mortgage insurance if you do not have at least 20% down. Over the last few years it has become very common to pay monthly mortgage insurance until you have 20% equity in the home. As values were increasing rapidly a few years ago, this was easy to do knowing you would probably eliminate mortgage insurance in 2-4 years. Now as values have decreased and are now stabilizing and starting to increase slowly, we aren't sure how fast we will see an increase in equity.
One option used frequently several years ago was an upfront one time mortgage insurance payment. It was based on the loan amount and paid at closing. The seller or buyer could pay it and then there was not a monthly mortgage insurance payment. Due to monthly mortgage insurance rates increasing, we are starting to see this option happen again. Today, the rate for the one time payment option is 1.95% of the base mortgage amount with a credit score of 760 or higher with 5% down. If your credit score is between 720 and 739, the rate is 2.25% of the mortgage amount. The more you put down and the higher your credit score, the lower the mortgage insurance rate is.
Monthly mortgage insurance is also based on credit scores. The lowest rate that I have seen with 5% down and a credit score of 720 is .67% of the mortgage amount. This company just adjusted it's rates based on credit scores and these are effective as of May 1, 2010. Most companies are at .94% for 5% down.
If you can ask the seller to pay some of your closing costs and/or if you have the money available to pay these fees, it may be worth looking into a one time fee. If your mortgage is $250,000, the one time fee of 1.95% is $4875 paid at the time of closing. It cannot be added to your mortgage as your mortgage has to be at 95% of the purchase price. If you paid a monthly payment, it would be $139.58/month until you have 20% equity in the home. If you live in the home for more than 3 years (actually 35 months), you will pay more by paying monthly mortgage insurance. It seems like a lot of money in the beginning, but over the life of the loan, it will cost you less to pay the one time fee if you have the ability to. If you plan to sell the home within 3 years, the monthly is better.
This would also help in keeping your monthly payment down as you will not have the monthly MI payment. Talk to your loan officer and see if this is something that makes sense for you to consider. Right now, mortgage insurance is still tax deductible, that may end the end of this year if Congress doesn't extend it. That is one more reason to consider this option.
Paying the one-time fee for PMI at closing is difficult for many borrowers. This amount could be $3,000 to $4,000.
Another option would be a second mortgage. Crunch the numbers. If the rate is good, the monthly payment could be less than the monthly PMI.
With the second mortgage, the goal is to pay it off as soon as possible without a prepayment penalty.