Ruth Asks… I am buying a house and have 10% down. I’ve been told I have to pay Mortgage Insurance – what is that exactly?

Mortgage insurance is a financial guarantee to your lender.  It helps to eliminate losses, in the case that you default on your loan. In other words, mortgage insurance takes the risk of providing an individual a mortgage loan, and spreads it between the lender and the insurance company.

Let’s use your situation as an example with a $250,000 purchase price. You have paid a 10% down payment, therefore you have put down $25,000 and taken out a $225,000 mortgage to pay the remainder. Since your loan offers less than 20% equity to the lender, they will in most cases require that you pay mortgage insurance.

Without mortgage insurance lenders would not be willing to take the risk of lending and this would in turn make it impossible for many to purchase a home. Homebuyers help cover the risk by paying the premiums as part of their mortgage payments every month.

There are two kinds of mortgage insurance; public and private.

  • Public mortgage insurance comes from the Federal Housing Administration and requires a homebuyer to pay a premium of at least 1 percent of the loan amount and a monthly amount when you put down the minimum of 3.5% on a FHA loan.
  • Private mortgage insurance is typically what you will face when your down payment is less than 20% of the cost of the home and you use conventional financing. Rates vary between 0.5% and 6% of the total amount of the loan per year. These rates can be paid monthly, annually or as one lump sum. Once you have paid your mortgage to less than *80% of the homes original value you can request to stop paying mortgage insurance. Also, in many cases you can have your home re-appraised and if it’s new appraisal gives you that 20% equity, it is more than likely that you will no longer be required to pay mortgage insurance.  (*some restrictions apply)

For many homebuyers, mortgage insurance may at first seem confusing and to some a waste of money, but without it you would not be able to purchase a new home unless you had a 20% down payment.

Bottom line… mortgage insurance simply reduces the risk of your lender and allows you to move forward with your plans without postponing purchasing a home until you have saved 20% for the down payment.

Meet Cheryl!

About Cheryl

As a successful business owner and community leader, Cheryl Braunschweiger is known and respected for getting things done with a degree of skill and enthusiasm that bring out the best in those around her - colleagues, clients and friends. The name of her business, ALMC Mortgage, reflects Cheryl's philosophy and personality. She says it stands for All Loans Must Close –a reflection of her determination to do whatever it takes to serve her clients. Cheryl has been in the mortgage lending business for 20 years. Read More About Cheryl
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