Today there is typically an insurance policy available to cover purchases or transactions of most any type, and that includes one of the largest purchase transactions people make in their lifetime, which is buying a home. A mortgage loan insurance policy is designed to protect the lender in case of default on the part of the purchaser.
Twenty percent down is a safe minimum
In cases where the home buyer makes less than a twenty percent down payment on their home, an insurance policy guarantees the lenders money is safe and they will regain at least part of the money they loaned if the buyer fails to pay or defaults on the loan. This same mortgage loan insurance is beneficial to the borrower as it allows them to not be required to pay as much. Typically a down payment is required to be at least twenty percent of the total of the loan, but some instances can be as low as five percent. The lower limit will be dependent upon the borrower having excellent credit and the borrower being willing to “cover” the difference through an insurance policy.
Pay more rather than less
There is no doubt that the more a borrower can afford to put down on a home, the less they will need to repay in the form of mortgage payments. Lenders, who offer fifteen year mortgages (rather than thirty years), will benefit from having the amount they have loaned returned far more quickly and borrowers will pay far less in interest over that period of time, plus have that home free and clear in half the time. In cases where at least twenty percent is paid down and the mortgage is secured by a fifteen year loan, the mortgage loan insurance may be substantially lower.
Mortgage loan insurance can be paid two ways
Typically mortgage loan insurance is included as part of the monthly mortgage payment or it may be considered a separate loan which requires a separate payment which can be made monthly, annually, or in a lump sum. Borrowers usually prefer to incorporate it into their monthly payment although it means they must pay on that insurance policy for the lifetime of the loan. The average cost of mortgage insurance ranges from one and a half percent to around six percent of the principal of that loan, and this is considered a tax deduction for the borrower.
Mortgage loan insurance protects lenders against defaulting borrowers
When the lender has mortgage loan insurance they will not need to worry about losing their money if the borrower defaults on the loan. This insurance can be public or private and that depends upon the insurer. Also known as a mortgage indemnity guarantee, this form of insurance pays the amount agreed upon in the policy, generally around twenty five percent. The buyer has another option if they can only offer less than twenty percent down and that is to borrow additional funds, sometimes called a second mortgage or a piggy back loan.
The use of borrow paid private mortgage insurance or BPMI allows borrows to obtain a home while paying less than twenty percent down. It is all to enable home ownership and is for the benefit of all parties concerned.