What is Mortgage Insurance?
Letâ€™s say you are about to purchase your first home and you apply for a $200,000 mortgage. A 20% down payment (which is what many banks prefer) on that mortgage would be $40,000. If youâ€™re unable to make that down payment, the lender might classify you as having a â€œhigh credit riskâ€ and you wonâ€™t be approved. So, what can you do?
Buying Mortgage Insurance
When potential home buyers are deemed â€œhigh credit risk,â€ they have the option of purchasing mortgage insurance so they can still get the home of their dreams! When purchasers arenâ€™t able to provide a 20% down payment of the value of the house theyâ€™re purchasing, mortgage insurance insures the lender theyâ€™ll be reimbursed for any losses if the homeowner isnâ€™t able to make their payments. Without mortgage insurance, government-sponsored enterprises and taxpayers are faced with covering these costs, which is why lenders arenâ€™t likely to put up the money without insurance.
How Does Mortgage Insurance Work?
The cost of your mortgage insurance will be added to your monthly mortgage payments. Although mortgage insurance will increase the cost of your mortgage, it also means youâ€™ll qualify to purchase a home you may not have been able to otherwise. Itâ€™s important to remember that mortgage insurance is intended to protect the lender – not you. If you fail to make your payments, the bank or lender will still receive their money, but your credit score can suffer, and you might lose your home to foreclosure.
Types of Mortgage Insurance
There are five types of mortgage insurance, four private and one thatâ€™s provided by the Federal Housing Administration (FHA).
The four types of private mortgage insurance (PMI) are:
- Borrower-Paid Mortgage Insurance
- Single-Premium Mortgage Insurance
- Lender-Paid Mortgage Insurance
- Split Premium Mortgage Insurance
The fifth type of mortgage insurance provided is known as an FHA loan or an FHA mortgage. While FHA loans have their advantages, theyâ€™re often more expensive than private mortgage insurance.
To learn more about the right mortgage insurance for you, get in touch with Lupton & Luce Insurance today!