Lender Mortgage Insurance: What Type Do You Need?

If you're buying a home and don't have the standard 20% down payment, then you may be required to purchase lender mortgage insurance. Lender mortgage insurance is used to pay your lender in the event that you're not able to pay for your mortgage, or otherwise default on your residential property loan. Although it is designed to protect your lender against loss if you stop making your payments, it does make it possible for you to purchase a home with very little or no actual down payment.

How It Works

Whenever you receive a residential property loan, and you didn’t pay the standard 20% down payment, then you will be required to pay a one-time payment for lender mortgage insurance to your lender. Amounts and fees for lender mortgage insurance vary according to the amount borrowed and the amount of your down payment. You generally have the option of paying the fee in advance, or having the fees and costs of the lender mortgage insurance included in your home loan; then the cost of the lender mortgage insurance would simply be paid in installments, along with him and with the rest of your home loan.

While purchasing lender mortgage insurance is not statutory, or required by law, the majority of lenders will require you to purchase lender mortgage insurance if you are borrowing an amount more than 80% of the property value at the time of purchase. Obviously, the easiest way to avoid paying lender mortgage insurance is to save money until such time as you can make a full 20% down payment.

Costs and Benefits

Lenders mortgage insurance protects the lender in the event you default, or do not make your payments, on your residential home loan; however, it does allow you to get into a new home with little or no money up front. This can benefit first-time homebuyers because it allows them to purchase a home much sooner than they otherwise would be able to.

Moreover, as home values continue to rise, this allows first-time homebuyers to purchase a home, while prices are still generally low. It is possible that the value of a home can increase at such a rate that it gives a first-time buyer more value and equity in a home, than the cost of the lenders mortgage insurance.

Types of Lender Mortgage Insurance

There are two terms generally referred to in the mortgage insurance industry: the first is lenders mortgage insurance, and the second -- private mortgage insurance. There are essentially the same things and there is no difference. Some people seem to prefer one term over the other; but, they serve the same purpose and function.

In addition to lender mortgage insurance, which is paid by the homebuyer, there is also lender paid private mortgage insurance. This type of insurance also pays the lender in the event that you default on your residential home loan, and is generally purchased by the lender if you do not make a standard 20% down payment on your home. The only difference is the lender pays for the cost of the private mortgage insurance and not the home buyer. However, most lenders will only agree to lender paid private mortgage insurance - if you agree to pay a higher interest rate on your home loan.

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