What is mortgage insurance and how do I know if it’s necessary for my loan?
Mortgage insurance may seem puzzling to first-time home buyers or seasoned home owners alike. But it doesn’t have to be. In order to understand mortgage insurance, it is necessary to understand a simple ratio about your loan called the Loan-to-Value ratio, or LTV.
LTV is the percentage or ratio of the total loan amount in comparison to the value of your home. For example, if I take out a $100,000 loan on a $200,000 home my ratio would be 100,000/200,000, which is 50%. So 50% of the value of this home is financed by the mortgage lender, and 50% is already paid off by the homeowner becoming equity.
This ratio is important to the lender because quite simply the lower the LTV ratio, the less risk of default on the loan. A borrower has a much higher vested interest in a home with a lower LTV ratio. Mortgage insurance insures the mortgage lender for any losses due to default on the loan. For conventional loans, any loan with a LTV over 80% will require mortgage insurance.
Most common types
The most common types of mortgage insurance are either a monthly payment included with your loan payment, or a large single payment due at closing upfront. Here at Box Home Loans your processor will help you find the most affordable insurance. opens in a new windowEssent and opens in a new windowUnited Guaranty are both common mortgage insurance companies.
You will decrease your monthly mortgage payment by eliminating the need for mortgage insurance if you can put at least 20% down. But 20% is often a very large payment that purchasers may not have available. This type of insurance provides you the opportunity to put down less than 20% and start living in your dream home sooner.
You will ultimately need to decide on your own what down payment amount makes the most sense for your long term financial goals. If you decide to put down less than 20% don’t fret, millions of other Americans are enjoying the benefit of getting into their new dream home sooner or in the case of a refinance, enjoying a lower interest rate even with the additional cost of mortgage insurance. It provides flexibility to the borrower and needed protection to the mortgage lender and investors.