Mortgage Insurance
The down payment is one of the most important parts of
buying
a home since it affects a lot of aspects of the home
buying process.
Your
mortgage payment, interest rate and the house you
can or can not afford are all dependent upon the down
payment.
Most mortgage companies require you to put down at least
20 percent of the cost of the home, in order to
be
eligible for a mortgage. But, for some people acquiring
this 20 percent can be almost impossible; but luckily
for them there are alternatives.
This is where mortgage insurance comes into play.
An article entitled, “Mortgage Insurance,”
on Bankrate.com from May 1, 2006, gives some vital information
on this aspect of the home buying process.
Mortgage insurance is necessary if your down payment is
less than 20 percent. If this occurs, you must obtain
mortgage insurance.
“With mortgage insurance, the borrower pays the
premiums, but the lender is the beneficiary. The coverage
protects lenders against the borrower's default. If a
borrower stops paying on a mortgage, the insurance company ensures that the lender will be paid in full. Mortgage
companies pick insurance providers for their customers,
but the borrowers have to foot the bill. Usually, they
do so in monthly installments. But some lenders offer
programs whereby the borrower pays the entire insurance
premium in a lump sum at closing.”
This process of obtaining mortgage insurance helps people
who would not be able to afford or save for a down payment.
Without mortgage insurance, many potential buyers would
not have enough for the 20 percent down payment and therefore
would not be able to buy a home.
There are a few ways that lenders can waive the need for
mortgage insurance, even if you are supposed to have it.
One of the ways you can make an agreement is by accepting
a higher interest rate on the mortgage loan.
“The rate increase generally ranges from three-quarters
of a percentage point, or 75 basis points, to a full percentage
point, depending on the down payment. A basis point is
one-hundredth of 1 percentage point. Borrowers can benefit
from this because mortgage interest is tax-deductible,
whereas mortgage insurance premiums aren't. But they'll
end up paying more interest over the lives of their loans
due to the higher rates.”
A popular part of mortgage insurance is using the 80-10-10
plan. This plan divides up the
loan
process and actually involves getting two loans.
“The borrower gets a first mortgage equal to 80
percent of the sale price, a second mortgage for another
10 percent of the price and puts the remaining 10 percent
down at closing. The second mortgage has a higher interest
rate. But since it applies to 10 percent of the total
loan, the monthly payments on the two mortgages can still
be lower than the monthly payment on one home loan with
mortgage insurance. Plus, interest on the second mortgage
is tax-deductible.”
This is not the only plan available. There are other
mortgage
insurance plans that split up differently such as
the 80-15-5 plan, and so on.
As this article shows there are a variety of options available
to people who are having trouble with the down payment.
With a little help and some extra paperwork, buying a
home can now become a reality.