It is generally accepted that mortgage insurance (MI) is a bad thing. Sure, it is an added expense and just about everyone would prefer to pay as little as possible, but mortgage insurance serves a purpose that benefits many people.
Mortgage insurance does not actually insure the person paying the mortgage, it insures the mortgage company against losses it may incur if the homeowner defaults on the mortgage. In covering this risk, however, mortgage insurance provides homeowners the opportunity to purchase a home with a lower down payment. So, in effect, the monthly premium paid for mortgage insurance is a tradeoff for the ability to obtain a mortgage and purchase a home without being required to put down 20% of the sales price.
Mortgage insurance comes in several different forms. Government mortgage insurance is charged on government-insured loans like FHA and USDA mortgage programs and is actually paid, through the regular monthly mortgage payment, to the appropriate government agency. These programs typically charge an upfront premium that may be financed in the loan in addition to the monthly premium. Monthly government mortgage insurance premiums are often paid for the entire life of the loan.
Private mortgage insurance (PMI) is paid, again through the regular monthly mortgage payment, to one of several mortgage insurance companies. Private mortgage insurance is usually cancellable under certain circumstances, such as when your loan amount is less than 80% of the value of the home. PMI sometimes allows for a few payment options. For example, you may be allowed to pay the full amount of the premiums at closing, thereby reducing your monthly payment. Sometimes, the lender may even offer a slightly higher interest rate in return for a lender credit to cover the costs of the mortgage insurance premium.
So, mortgage insurance, if you need it, is not necessarily the big bad wolf that many think it is. It is what allows people to buy homes for 3.5%, or sometimes even less, down payment. Additionally, there may be several different payment options available that allow you to structure your payment in the most beneficial way for you. Contact me today to discuss your situation and discover all the options available to you.