Buying a home is an important milestone in everyone’s life, however, there are several costs associated with a home purchase. One of the important expenses that you might need to pay for is mortgage insurance. Mortgage insurance is required by home buyers when they put a down payment of less than 20% of the home value. For example, on a $300,000 home, if your down payment is less than $60,000 ($300,000 x 20%), you will need to get mortgage insurance.
Mortgage insurance is required by the lender because of the additional risk of lending you more money than 20% of the home value. The insurance protects the lender if the homeowner were to default on their payments. So, what are the costs, length of payment, and most importantly different types of mortgage insurance?
How much is Mortgage Insurance?
The most common type of mortgage insurance is private mortgage insurance (PMI). PMI can range from 0.4% - 2.25% of the loan amount. For example, if you have a loan for $400,000, then PMI can range from $1,600 to $9,000. So, what determines whether you get a low PMI rate or a higher one:
How long do I have to pay for Mortgage Insurance?
Mortgage insurance is required for home loans where the down payment is less than 20% of the loan. Therefore, PMI can be canceled when you attain 20% homeownership. Hence, insurance does not stay for the life of the loan, it can be removed on average in 6 years depending on the size of the initial down payment.
What are the different types of Mortgage Insurance?
There are four different types of mortgage insurance:
How to avoid Private Mortgage Insurance?
Well this is an important question, nobody wants to pay for insurance if it does not benefit them. There are 3 ways to not pay for insurance:
In conclusion, insurance can be an annoying additional payment that you have to make, however, it is useful because it allows lenders to give mortgages to individuals who cannot afford the full 20% down payment. Try your best to save up enough funds in order to avoid paying mortgage insurance. Most importantly, be sure to get rid of PMI when you attain 20% homeownership!
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