Mortagage Insurance – A Key To Affordable Housing

2007-03-08 10:33:40

( Financial )



The biggest challenge if you are a first-time home buyer is raising the money to pay for the down payment on mortagage loans, especially when mortagage rates are soaring high. Conventional mortagage loans require that you put up at least one-fifth of the loan amount before lenders will release the funds for your home purchase.

To make housing affordable and the dream of home ownership possible for many home buyers, mortagage insurance came into existence. Mortagage insurance protects lenders like National City Mortagage against loss in case you default in your monthly mortagage loans payments. It is different from endowment mortgages and some types of insurance that pay off the mortagage loans in case you die or become disabled.

Most lenders sell your mortagage loans to the secondary mortgage market. The rules of the secondary market restrict the ability of your lender to make high loan-to-value mortgages without some guarantee against your default. Private mortagage insurance allows your lender to increase their loan-to-value ratios and still sell their mortgages in the secondary market.

If the private mortagage insurance company approves your loan, it will issue a commitment to insure your lender. With this guarantee, your lender can increase the loan amount while you pay the mortagage insurance premium and receive the benefit of a smaller down payment. Private mortagage insurance, therefore, is one key to afford your home.

The required amount of your mortagage insurance will depend on the term and type (fixed or adjustable) of mortagage loans you take out and the amount of your down payment.

The amount insured will be some percentage of the loan and may decrease as your loan-to-value ratio declines with your monthly payments. Keep in mind though that the law gives you protection, that is, when loan-to-value ratio becomes less than eighty percent, you will not need to pay for mortagage insurance.


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