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So, you want a new home. However, you are a first-time buyer or you don’t have the financial resources to come up with a traditional down payment. What can you do? You can apply for a low down payment mortgage by purchasing a mortgage insurance policy. As discussed in our previous article, mortgage insurances reduce the lender’s risk because the insurance provider commits itself to covering the financial loss if the borrower does not honor the loan’s payments. This reduction in the risk of lending money for a home allows lenders to reduce their down payment requirements. There are two types of mortgage insurance: government insurance and private insurance.
Government Mortgage Insurance
There are three main government mortgage insurance providers: the Federal Housing Administration, the Department of Veteran Affairs and the Department of Agriculture’s Rural Housing Service. However, most of us can only apply for an FHA mortgage insurance, because the Department of Veteran Affairs and the Department of Agriculture’s Rural Housing Service mortgage insurances are restricted to veterans and farmers (or homeowners in certain rural areas), respectively.
There are many mortgage insurance providers in the private sector. In fact, most lenders either provide their own mortgage insurance or are associated with a mortgage insurance provider. It is a good idea to approach several lenders and ask for details on the mortgage insurance providers they work with and their fees. This applies for lenders who work with the FHA and with private insurance companies.
The cost of mortgage insurance varies from one provider to another, from one region to another and by house type and cost. Typically the mortgage insurance of a property will represent 1 or 2 percent of the property’s buying price as well as yearly payments. Government mortgage insurance tends to be cheaper and have less stringent requirements. However, private mortgage insurance providers are required to stop the insurance once you pay for 20 percent of the mortgage balance. Government mortgage insurance providers on the other hand do not generally allow you to cancel a mortgage insurance until the loan has been repaid.
The Bottom Line
Mortgage insurances can provide borrowers with a way of paying for the down payment of a home. However, they do increase both the monthly cost of a mortgage and the overall interest paid on the mortgage balance. Therefore, only buy mortgage insurance if you cannot afford to pay a down payment. If you do have the cash for a down payment, there are probably few investments that provide a better return than reducing the balance of your mortgage and kick starting the equity on your home.
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