Mortgage insurance is offered by either the government or private insurance companies to enable lenders to offer smaller down payments on loans. Before mortgage insurance existed, many had to pay a minimum of 20% down to purchase a home which made homeownership unaffordable for many Americans. Mortgage insurance covers lenders for losses up to a certain amount if a borrower defaults on their mortgage.

There are two types of mortgage insurance available:

  1. FHA mortgage insurance.  FHA is a government program which requires a down payment of as little as 3.5% of the sales price and mortgage insurance is required on FHA mortgages, regardless of the amount of down payment.
  2. Conventional mortgage insurance. Conventional mortgages are home loans that are not insured or guaranteed by the government, as in the case of the FHA mortgage example. Many conventional loans are sold to Fannie Mae or Freddie Mac and thus follow these entities “conforming” guidelines.

Conventional or private mortgage insurance enables lenders to offer conventional loans with a minimum down payment of 3.0% to 5.0%. Many 3.0% down conventional mortgages are restricted to low-to-moderate income borrowers.

Example of down payment costs:

—$400,000 home purchase with a 20% down payment requires $80,000.
—$400,000 home purchase with a 5.0% down payment requires $20,000.
—$400,000 home purchase with a 3.0% down payment requires $12,000.

One can see a great benefit from being able to use mortgage insurance from a conservation of cash perspective.

What is the cost of mortgage insurance?

The cost of mortgage insurance will vary greatly, depending upon several factors:

  • The mortgage insurance alternative selected.
    •The amount of the down payment.
    •The type of the mortgage such as a 30-year or 15-year loan – or an adjustable rate mortgage.
    •Whether the mortgage insurance is paid for by the borrower or financed through a higher interest rate.
    •The qualifications of the borrower, especially the credit score.
    •Whether the mortgage is a FHA or conventional loan.

In addition, depending upon the alternative selected, the cost of mortgage insurance can be an upfront fee, an additional monthly payment, or financed into the loan amount or interest rate. Or the cost may be represented by some combination of these alternatives….

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