Mortgage insurance, sometimes referred to as private mortgage insurance, is basically a financial guarantee for the mortgage lender insuring them against any kind of financial loss in the circumstance that a borrower defaults on a mortgage. In the event that the borrower defaults on their mortgage due to an inability to pay off the remaining loan balance, the lender takes control of the title to the property and the mortgage insurer eliminates loss. The cost of mortgage insurance generally varies from one insurer to the next, but all give you the option of choosing to pay for it in 1 of 3 ways; either in 1 lump sum, monthly or annually. All in all, mortgage insurance basically gives homebuyers more options.
Mortgage insurance can benefit anyone who is in the process of purchasing a home. First time homebuyers can use mortgage insurance to increase their buying power by allowing for a lower down payment that could help them to afford a home as soon as possible. Repeat homebuyers make a down payment that is lowered each successive time you purchase a home. They might also find themselves eligible for a series of tax benefits.
Although not always required, lenders generally require mortgage insurance when the loan-to-value (LTV) of the property is greater than or equal to 80%. (For example, a $1,000,000 home with an $800,000 mortgage has an LTV of 80%) If a lender doesn't require mortgage insurance and you choose not to invest in it, then you will face a required payment of as much as 20% of the property's purchase price as a down payment. (If you have mortgage insurance, the down payment will be significantly lower at around 5% - 10%)
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