5 Facts About Private Mortgage Insurance and Why You Should Avoid It
11/05/2010
Private mortgage insurance is designed to protect the interests and investments of lenders. When a lender gives money to a borrower who isn't a good credit risk, the lender typically requires the borrower to pay for mortgage insurance in order to mitigate the potential loss of funds. The cost of the premiums is added on to the mortgage payments made by the borrower each month.
If you're planning to take out an FHA mortgage, private mortgage insurance will be required. The following five facts will help you better understand mortgage insurance.
1. Mortgage insurance is not homeowner's insurance. There are many different types of insurance that you'll need to consider if you're planning a home purchase. Mortgage insurance is not homeowner's insurance. It won't insure you, the borrower, against damage to your home. It isn't hazard insurance.
2. Mortgage insurance insures the lender against your risk of default. You pay for it, but you don't necessarily benefit from it directly. It helps you by allowing you to take out a loan with a lower down payment. It won't help you take advantage of the lowest mortgage rates or optimal loan terms.
3. Mortgage insurance can be tacked on to any loan type. If your down payment is less than 20% of the purchase price of the home, you'll likely be required to pay mortgage insurance premiums regardless of whether your loan is a fixed rate, adjustable rate, FHA, jumbo, refinance, or other loan type.
4. Mortgage insurance can be paid for in number of ways. It can be added on to the monthly mortgage payment and paid out over time. It can be paid for all at once in a lump sum at closing. Often, the mortgage insurance premiums can be rolled into the loan itself.
5. Mortgage insurance is a needless expense. If you can avoid it, do so. It's worth spending time to save up enough money to make the necessary 20% down payment in order to avoid the added monthly premiums.
