Small Down Payments Will Cost You More

Private Mortgage Insurance (PMI) is a mortgage lender's insurance policy against highly-leveraged homeowners. It's typically required when homeowner equity is less than 20 percent at the time of closing.

With PMI defaults up 40 percent over last year, though, private mortgage insurers are taking big losses.

They're also taking big-sized steps to prevent additional claims going forward. This is bad news for those who opt to put down less than 20 percent for a home purchase.

The first PMI change: new, higher insurance rates. (This does not apply to FHA purchases)

Like home insurers that adjust premiums after a worse-than-expected storm season, PMI insurers are raising mortgage insurance rates for all homeowners, regardless of credit history. The higher premiums are meant to offset the higher losses.

The second change: Some PMI firms are discontinuing coverage for "high-risk" transaction types. This includes purchases of non-owner occupied properties, and cash out refinances above 85 percent loan-to-value.

Both changes, however, point to similar conclusions about home loans: Home equity is increasingly important for today's homeowner.

PMI rates are higher than they were six months ago and the rising number of defaults makes it likely that rates will rise again soon. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.

Private Mortgage Insurance Rates Approaching Stratosphere

Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.

With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues sinking rapidly.

So far this year, mortgage insurers have paid out $6 billion in claims.

In response to the losses, the mortgage insurance industry is using two tactics to return to profitability -- and both mean bad news for homeowners.

Raise the minimum standards to get insurance.

Raise the annual mortgage insurance cost.

This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.

Because of the higher PMI rates, it's getting more expensive for small-downpayment home buyers to finance their homes. And that's if they can even still get mortgage insurance.

Some mortgage insurers now require a 10 percent minimum downpayment in certain states.

So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult. If you plan to make a small downpayment on your next home -- or plan to refinance your current low equity home -- consider moving up your timeframe.

It may not be as cheap or as easy to get financing as it is today.