What Is Mortgage Insurance & When Is It Required

Mortgage insurance is a policy that protects lenders against the losses that can occur when a borrower defaults on a mortgage loan. This is usually a borrower paid premium that is collected on a monthly basis as part of the overall monthly payment. At times it may be collected as an upfront fee on specific loan programs like FHA and VA. Lenders will even go as far as offering a lender paid mortgage insurance programs. Mortgage insurance is required when a borrower finances more then 80% of their property value in one loan, or in the case of a purchase transaction puts less than 20% down payment.

Having to pay mortgage insurance is not ideal, but its also not the end of the world. On most loan programs it is only required until the property reaches 80% loan to value which is determined by an automated market value or full appraisal. Equity can be built up in a combinations of different ways; making a lump sum principle payment, appreciation in property values, or through the loan amortization making your scheduled monthly P&I payments.

Mortgage insurance is a great product because it allows potential buyers to purchase a home with less then 20% down as long as they can afford the monthly payment. This allows buyers to enter the market and potentially build equity as the market rises as opposed to sitting on the sidelines waiting to save 20%. In certain markets the rate of appreciation can rise faster then their savings rate, thus making it almost impossible to enter the market. 

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