Mortgage insurance explained

It is a common mistake that many who want to be home buyers think they cannot purchase a home unless they have a 20 percent down payment. This is not the case, but what happens when someone does not have 20 percent down? That is where mortgage insurance comes in. Mortgage insurance is not protection for the homeowner and is not to be confused with a homeowners insurance policy. It is a policy that protects the mortgage lender and is required if you do not have 20 percent down or utilize certain loan programs such as FHA and USDA.

Why is it required? Well, the answer is simple: to reduce the loss the lender would experience if the homeowner defaults on payments, passes away or is otherwise unable to pay the obligations of the mortgage loan. For you as a buyer, it helps you afford a house that you might not otherwise be able to because you may not have the 20 percent down payment.

How is it paid? Mortgage insurance is paid with your monthly mortgage payment. It makes your payment higher than it otherwise would be if you did not have it. The loan program, your credit score, the number of buyers can all impact how much your mortgage insurance premium is. There is also an option to prepay all or part of the premium upfront when you purchase.

Will you always have it? Different loan program handle mortgage insurance differently. With conventional financing, mortgage insurance is handled with a private company and is referred to as Private Mortgage Insurance, or PMI. Rates and cost vary by borrowers based on credit score and down payment. There is no cost up-front and in some cases you can cancel your PMI if specific lender required terms are met. If you get an FHA loan your mortgage insurance is paid to the Federal Housing Administration (FHA) and is required for ALL FHA loans no matter how much you put down on the home. It costs the same for all borrowers no matter the credit score and is determined based on your down payment. FHA mortgage insurance also includes an up-front portion which can be paid as part of your closing costs or you can roll the fee into your mortgage. USDA is similar to FHA in a couple of ways. You can roll the fee into your mortgage loan and everyone pays the same premium rate. However, USDA mortgage insurance is cheaper than FHA. For both FHA and USDA, you will have mortgage insurance monthly expenses as long as you have the mortgage. Lastly, if you are eligible for a VA loan, the VA guarantee fee replaces the mortgage insurance and you do not have a monthly expense.

How can you avoid mortgage insurance? In order to not have mortgage insurance, you will need 20percent down and obtain conventional financing or a VA loan. Some lenders will also allow you to obtain a second mortgage loan, or "piggyback" loan, for the 20 percent at which point you would have two loans and two monthly mortgage payments, but no mortgage insurance.

You can contact Alysha Boles at (661) 858-7214, or visit http://www.advisoralysha.com. See ad on this page.