Buying a home is something that so many people want to do, which is why it’s considered the American dream. To be honest, it is probably time to re-evaluate the American dream, as it’s probably changed. More than just owning a home, we believe that many Americans would be much happier with something such as job security, retirement funds, college tuition they can afford for their kids, health insurance that’s comprehensive and affordable, and even just additional time in the day they can spend with their families who they miss because they are always working and too busy doing things for others. Of course, owning a home is still part of the American dream, we just don’t think it is the sole dream anymore.
Now that we are completely off-topic, owning a home is expensive. And for many people, it’s possible without a down payment – or at least without the entire down payment. However, when you purchase a home without a full 20% down payment, you will be required by your lender to purchase something called mortgage insurance. This is a must, as it’s going to protect your lender in the instance that you default on the mortgage of your new home and they take the hit. Whether your mortgage insurance is issued by the government or it is privately held, if you do not put down 20% on the purchase of your home, you will be required to pay for this product each month as it is incorporated into your mortgage. If you’re a new homebuyer, a first-time homebuyer or just not familiar with this kind of insurance, we can help you understand what it means and how it will affect you when buying a new home.
What is Private Mortgage Insurance?
Referred to often as PMI, this type of insurance is what your lender requires you to obtain so that they still get their money if you stop paying on your home and it goes into foreclosure. This is a savior for lenders, especially in an economy in which the chance of a home being foreclosed on is higher than ever. Additionally, there is also other mortgage insurance that is not considered private. This type of insurance is issued by the government if your home is purchased with a government loan such as a VA of FHA loan. This is essentially the same thing as PMI, except you do not have to find it in the private sector. You simply find that your lender rolls it into your mortgage for you.
The purpose of this type of insurance is to protect lenders. They are taking a risk assuming you will pay back the money they give to you to buy a home. When they give you that loan, they become the owners of the home. You pay them until you own the home. If you stop paying for them, they are the owners of a home for which no one is paying and the lender loses a lot of money. Because of this, you will be required to pay this insurance so that the lender gets their money should you stop paying for the house. It’s their insurance that you will not leave them in a bad position.
How Much is Mortgage Insurance?
To be honest, it’s impossible to tell without knowing your exact financial situation. The cost of mortgage insurance differs from loan to loan and homeowner to homeowner. Additionally, it all depends on the type of mortgage you have. For example, if you have a government loan (VA or FHA, for example) you will pay up front when you close and then you will have that payment collected in escrow monthly and paid off once a year. Additionally, it all depends on your credit score, the cost of your home, the amount of your down payment and the company you use to pay for your mortgage insurance. However, you can expect to pay anywhere from $30 to $70 on every $100,000 you finance when you buy a new home. It’s easy math to follow if you have your personal finances in front of you.
How Does it Work?
The way it works sounds simple and it is, but it can be a bit more complex depending on the type of loan you have and the loan to value ration of your home. Here is an example of how mortgage insurance works. You buy a home, and you put down the full 20%. You don’t need mortgage insurance because your loan to value ratio works out. However, if you only put down 15%, you will pay this mortgage insurance rate until your loan to value ratio is at 80% of the value of your home. What this typically means is that after you have paid off a significant portion of your home, you will no longer need this type of insurance and you will be able to save quite a bit on your monthly mortgage costs.
What Happens if I Don’t Want to Pay This?
Here’s the deal when it comes to mortgage insurance; no one wants to pay it. However, you might not have a choice. If you do not want to pay for mortgage insurance, you should wait to purchase a home until you have approximately 20% to put down. This means you will need 20% of the asking price, which can vary significantly depending on the home. For a million dollar home, you will need $200,000. For a $100,000 home, you will only need $20,000. If you don’t want to pay for mortgage insurance so that you can keep your mortgage rates low, then you will need to have the full down payment.
Otherwise, you have no choice. You cannot purchase a home without a 20% down payment and not be required to have mortgage insurance. It’s not up to you, because the lender will not provide you with the loan you need to purchase the home without this insurance. In short, if you don’t want to pay it, don’t buy the home without the down payment.
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