Private Mortgage Insurance

By JJ Singh
Home Mortgage Columnist

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Increasingly, prospective homebuyers want to make less than a 20% down payment. But did you know that in those cases private mortgage insurance is almost always added on, and that will always cost you money.

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New Home Loans and Risks

You know how it goes with investments: you don't really appreciate something unless you pay for it. For example, the pricier the car, the more likely you are to wash and wax it. It all has to do with your investment. The more you've invested in a project, in music lessons, in a computer class, or a big purchase, the more likely you are to value it.

That's exactly how banks feel about homeowners and the amount of equity they have in their home. Banks view new home loans with low down payments as being more risky than those home loans with an initial cash outlay of over 20%. But if these loans are more risky, why do lenders still make them? It's because they are guaranteed by private mortgage insurance.

What is Mortgage Insurance?

Mortgage insurance is a feature that you are obligated to buy if your down payment is less than 20%. Your monthly payment could increase by as much as 1% until the equity in your home reaches a certain point, after which point you are no long required to have insurance. The insurance protects the bank's investment in your loan in the event that you default on the mortgage because the bank can recover the balance on the loan via mortgage insurance.

In short, mortgage insurance can benefit both homebuyers and lenders. Homebuyers can afford a home sooner (save for less time) and lenders can be secure in knowing the loan will be paid back.

Sources:

Understanding Private Mortgage Insurance

About the Author

JJ Singh is a loan consultant who has mortgaged his life away to the micro finance industry in New York City. He holds a Bachelor Degree in Economics from the University of Virginia.

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