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With all the costs involved in buying a home, home buyers may wonder if the added expense of mortgage insurance is necessary. This insurance is not a legal requirement; however, if the home is financed, the lender will likely require it. Mortgage insurance should not be confused with homeowners insurance. They are two completely separate types of insurance. This insurance does not provide protection to the home buyer, but covers the lender’s interest in the event the buyer defaults on the loan payments. Although lenders generally require mortgage insurance, there are certain instances where home buyers may forego purchasing mortgage insurance.

When you need insurance

If the homeowner makes a down payment of less than 20 percent of the home’s total purchase price, the mortgage lender will require the buyer to purchase a mortgage insurance policy. This insurance protects the lender in the event that the borrower defaults on the mortgage loan. If the buyer is making a substantial down payment of at least 20 percent of the home’s purchase price, the lender will not require this insurance unless the borrower has low credit risk. In this case, the lender may require the buyer to purchase mortgage insurance, even if they are making a down payment of 20 percent or more on the home.

Types of home mortgage insurance

· Public insurance: The Federal Housing Administration provides public mortgage insurance, which is available at a premium of 1 percent of the closing amount of the loan. In most cases, this premium is financed by the lender, who in turn pays the insurance premium to the FHA. Public mortgage insurance is offered for home financing through the FHA. There is a similar program for home mortgage insurance for homes that is funded through the United States Veterans Administration.

· Private insurance: Private mortgage insurance, or PMI insurance, is not provided by the government, but by private insurance companies. Insurance premiums can range from 5 to 6 percent of the principal balance on the loan. The premium can be paid in a single balloon payment, annually, or in monthly payments that are added to the monthly mortgage payments. Borrowers are authorized, by law, to request cancellation of PMI insurance when the balance of the mortgage loan is less than 80 percent of the value of the home.

Are there alternatives to this type of mortgage insurance?

There are ways to avoid paying for mortgage insurance in full. The easiest way to avoid paying it is by saving money until the buyer can make at least a 20 percent down payment on a home purchase. This can delay home ownership, but buying a home with a higher down payment can allow the buyer to earn a lower interest rate and save by not having to buy insurance.

There are also home loans available called “Non-PMI” loans. Mortgage insurance is still provided, but the cost is paid by the lender and not by the borrower. The interest rates for these types of loans generally have a higher interest rate than traditional home loans.

Receive insurance advice

If home buyers are still unsure about their options for purchasing home mortgage insurance, they can consult with a Certified Mortgage Planning Specialist (CMPS). A CMPS has financial planning experience in all areas of mortgages, including home mortgage insurance. Mortgage brokers and real estate agents also have a broad knowledge base on mortgage insurance requirements and can advise buyers on their best options when purchasing mortgage insurance.

If a home buyer doesn’t have the financial ability to make at least a 20 percent down payment, there may be no way around buying mortgage insurance. This insurance has some advantages. It’s a way that first-time home buyers who don’t have a substantial amount of money for a down payment can afford to buy a home. Even if it turns out that mortgage insurance is required; As the homeowner pays off the mortgage, they will eventually be able to cancel the insurance required by the lender.

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