Buying a home is a huge investment, so it’s no wonder that the process of applying for, obtaining and signing for a mortgage can be a pretty complicated one. In an attempt to clarify the terms used and help our home buyers understand the mortgage process, we’ve begun this “All About” series. With these posts, we hope to help you find quick answers to your questions, getting you acquainted with how buying a new home works, and putting you comfortably on the road toward homeownership.
Today, we’re covering a common term which often confuses many first-time home buyers: mortgage insurance.
What is mortgage insurance?
Mortgage insurance, also known as private mortgage insurance or lenders mortgage insurance, is a small insurance fee used to offset a lender’s liability in extending a borrower a loan. The insurance protects the lender in case they cannot recoup the full amount of money that they lent to the borrower in the event they have to take back ownership of the property.
Why is mortgage insurance necessary?
Mortgage insurance, by off-setting a lender’s potential for monetary loss, actually makes the cost of borrowing lower than it would be without the insurance, as it reduces the need for the lender to raise the mortgage interest rate. This insurance also opens up lending to people who may not otherwise qualify (due to credit problems, for instance) by reducing the risk the lender takes on when extending such a large loan.
Does every borrower have mortgage insurance?
Not necessarily. Typically, anyone who carries equity of at least 20 percent in their home is not subject to mortgage insurance. Borrowers who make downpayments of at least 20 percent are not subject to mortgage insurance, and even those borrowers who don’t make downpayments can make arrangements to cancel the insurance once their property value has appreciated and they hold a 20 percent equity stake in their home.
How much does mortgage insurance cost?
The costs of mortgage insurance vary, but the average in the United States is about $55 per month for every $100,000 borrowed in the mortgage.
Is there any way to avoid paying mortgage insurance?
Financial situations vary widely from borrower to borrower, but for some home buyers, it makes more sense to opt for a second mortgage instead of paying monthly for mortgage insurance. To find out more about this alternate financing method—or to answer any of your questions about home loans and the home buying process—simply contact us, or stop by one of the LGI Homes communities near you.