Why Do We Need Private Mortgage Insurance?

Question: We’re buying with 10 percent down. Our lender says we can get a loan but only with private mortgage insurance. What is private mortgage insurance and why do I need it.

Answer: Lenders want as little risk as possible when they make a loan — a not-unreasonable position. To limit their risk they want borrowers to put down 20 percent of the property\’s purchase price. But many buyers don’t have 20 percent down, instead they have less — say 5 or 10 percent. In such situations, instead of waiting until they have the necessary cash, borrowers obtain private mortgage insurance (MI).

Lenders will make a loan with MI because they know that if the home goes to foreclosure the MI company will assure certain payments, just like other forms of insurance. To lenders, MI coverage reduces risk and that means they’re happy to make loans with far-less than 20 percent down.

There is a cost to MI, but unlike many forms of insurance you are getting a benefit even if no claim is ever made. With MI you get a loan that requires less down, which means you can buy now. If you believe home values will rise, buying now means you can purchase at a lower price then if you wait the time it will take to assemble a 20-percent down payment.

Alternatively, if you can buy with 20 percent down rather than a lower amount it’s something to consider. By investing the extra cash in your home it won’t earn interest or be available for other uses but you will have a smaller mortgage payment (because less is being borrowed) and you will not pay MI fees (because with 20 percent down MI is not generally required).

For additional information concerning MI, try: www.privatemi.com.

Syndicated originally by Content That Works and posted with permission.

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