mortgage insurance
Not to be confused with mortgage life insurance or homeowners insurance, mortgage insurance (Also referred to as private mortgage insurance, PMI) is simply a financial guarantee for the mortgage lender that insures them against financial loss in the circumstance that a borrower defaults on a mortgage. In the event that a borrower defaults on their mortgage, the lender takes control of the title to the property and the mortgage insurer eliminates loss. The cost of mortgage insurance generally varies from one insurer to the next. You can choose to pay for it in 1 of 3 ways, either in 1 lump sum, monthly or annually.Who is mortgage insurance right for?
Mortgage insurance can benefit any/all prospective homebuyers. If you are a first time home buyer, then mortgage insurance has the potential to increase your buying power by allowing for a lower down payment that could help you afford your house sooner rather than later. If you are a repeat homebuyer, you are able to make a down payment that is lowered each successive time you purchase a home. They might also find themselves eligible for certain tax benefits.
Although not always required, lenders generally require mortgage insurance when the loan-to-value (LTV) of the property is greater than or equal to 80%. (For example, a $100,000 home with an $80,000 mortgage has an LTV of 80%)
If a lender doesn't require mortgage insurance and choose not to invest in it, then you will generally be required to pay 20% of the property's purchase price as a down payment. For the sake of comparison, if you have mortgage insurance, the down payment will be significantly lower at around 5% - 10%.
All in all, mortgage insurance basically gives homebuyers more options.
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