Of all the questions our clients have for us, one of the most common is, “What is mortgage insurance?” Mortgage insurance is often referred to as home-loan insurance or a mortgage guarantee, but each one means the same thing.
Understanding Mortgage Insurance
If you’re hoping to buy a home, most banks require that you put down at least a 20% down payment before providing you with a loan. That means you’d need to provide an $80,000 down payment on a $400,000 mortgage. If a homeowner can’t provide this down payment, they’re considered “high risk” by banks and are often denied their mortgage.
Luckily, mortgage insurance exists! With mortgage insurance, you’re providing the bank with the assurance that they’ll be protected and reimbursed if the homeowner isn’t able to make their mortgage payments.
What Are My Options?
There are five types of mortgage insurance policies. Homeowners can choose from four private options or the public option known as an FHA (Federal Housing Administration) loan. Most homeowners opt for private mortgage insurance because they tend to be more affordable.
If you decide to buy private mortgage insurance, you’ll have four options:
- Borrower-Paid Mortgage Insurance
- Single-Premium Mortgage Insurance
- Lender-Paid Mortgage Insurance
- Split Premium Mortgage Insurance
How Does It Work and What Does It Cost?
When you buy mortgage insurance, your premium will be added to your monthly mortgage payment. While this means you’ll be paying a bit more each month, mortgage insurance also means you’ll qualify for owning a home you wouldn’t have been able to otherwise.
Most private mortgage insurance premiums are between 0.05% and 1% of your mortgage amount.
If you’d like to avoid this additional cost, you may want to consider purchasing a less expensive home that you can afford the down payment on, or wait a little longer to buy the home of your dreams.
If you’d like to learn more about mortgage insurance and what the right option for you is, get in touch with ASA Insurance today!