Private or Personal Mortgage Insurance
Surely you've noticed that it seems to take longer to save a down payment than it did for our parents or grandparents? There's a reason for that. Relative to the growth in home prices over the last quarter century, Americans are earning less and, as a result, saving less. And as the prices of homes go up the size of the down payment needs to be bigger, not smaller.
Enter mortgage insurance. It is sometimes called private mortgage insurance or personal mortgage insurance. Mortgage insurance allows you to get a mortgage with less than 20 percent down. This means you can buy that house now rather than wait until you save up enough.
As a result, mortgage insurance has become very popular. The government reports, that in 1994, nearly one of every two homebuyers obtained a low down payment loan and many of them used private mortgage insurance to realize their homeownership dream.
Still, you probably don't know much about mortgage insurance. Most people don't. Private mortgage insurance, is insurance that actually protects the lender. Many lenders will require private mortgage insurance on a mortgage because the less money that a buyer has invested in a home, the greater the chance that they default on the loan. Private mortgage insurance becomes a financial guaranty that protects lenders against loss in the event you default.
Without mortgage insurance lenders will typically require a down payment of at least 20 percent. So, if you don't want to have to keep saving while the cost of houses goes up private mortgage insurance might be a good solution for you.
By going with mortgage insurance, first time homebuyers can increase their buying power. For example, $10,000 constitutes a 20 percent down payment on a $50,000 home. However, with mortgage insurance, that same $10,000 can also provide enough financial leverage to help you buy a $200,000 home with only five percent down.
This is the true value of private mortgage insurance.
Don't confuse private mortgage insurance with mortgage life insurance. Private mortgage insurance puts people in homes; mortgage life insurance pays all or a portion of your mortgage in the event of your death.