There are many different facets to the home buying process and mortgage insurance is definitely one you need to understand. If you want to buy a home, then mortgage insurance is a term you have probably heard thrown around by lenders, your real estate agent, and so forth, but what does it mean and why do you need it?
Let’s start with the basics and go over some of the general terms that you will run into when you are navigating the wide world of real estate insurance.
1. MI or PMI: MI is short for Mortgage Insurance and PMI is short for Private Mortgage Insurance. We’ll talk more about these later.
2. FHA: This is short for Federal Housing Administration. This is a government agency that governs all things real estate. From construction to home loans, FHA is the one who handles it.
3. VA: the VA stands for Veteran’s Affairs. They are a branch of the government that takes care of veterans. They offer some housing benefits to veterans, but we will cover more of this later.
So what is mortgage insurance, anyway? Well, it all starts with the mortgage itself. A mortgage is a loan that you get from the bank to buy a home. These are usually large loans that can cost the bank or lender who gives you the money quite a bit. So, they will usually ask for what is called a down payment. This is usually a sum of money that you pay the lender or bank upfront before they give you the loan. They ask for this just in case you don’t end up paying off your mortgage like you promised to.
If a homeowner declares bankruptcy or defaults on the loan in anyway, it will cost the bank quite a bit of money, so the down payment ensures that they get something out of the deal. Or rather it softens the blow if the person can’t pay back the money.
Usually a bank or lender will require the borrower to provide a down payment equal to a certain percentage of the total cost of the house. The exact amount will vary depending on the contract, but usually it will be about 20%. So, if a home is priced at $100,000 and you need to pay a 20% down payment, then you will need $20,000. However, if you can’t pay that much, you can always work out a deal with the lender to pay less. This is where mortgage insurance comes into play.
The way it works now is like this: if you don’t pay 20% or more for your down payment, you will almost always be required to get mortgage insurance. Mortgage insurance is like any other insurance policy. Since the lender won’t be getting the 20% they want at the beginning of the deal, they will want some other way to know that they won’t get the short end of the stick if you default on your loan.
Usually, mortgage insurance is a small fee added to your monthly mortgage payment. It may not seem like much, but it is highly likely that it will cause you to spend more on your home than you would have had you paid the 20% down.
So, if MI is simple mortgage insurance, what is PMI? PMI stands for Private Mortgage Insurance. This means that you have gone through a private company to get your insurance instead of going through the government or government affiliated agency. There are different pros and cons to both normal MI and PMI which all depend on the type of insurance and loan you happen to get. (The best option is to always shop around).
Now, let’s take a moment to talk about VA and FHA loans. Like we said earlier, VA stands for Veteran’s Affairs and FHA is Federal Housing Administration. Both of the agencies offer loans to people that don’t require a down payment or only require low down payments, but will also have a type of mortgage insurance built in. (Again, be sure to shop around when it comes to these loans as they may not be the best deal for you).
Another thing to consider though is that VA loans are reserved for veterans. So, if you have not served in the armed forces, you will want to look into an FHA loan. But if you are eligible to get a VA loan then you will most likely only have to pay a low down payment or 0 down if you are lucky.
Now, what are the pros and cons to you as a home buyer for having mortgage insurance?
One of the biggest pros about mortgage insurance for a home buyer is that you can buy a home quicker than if you had to pay the full 20% down. If you can agree on a lower amount down then you won’t have to take the time to raise the capital necessary. Thus getting you in the house much faster.
Another pro is that you can use the money that you would have used for your down payment in another investment. Let’s say that you have agreed on a 10% down payment with mortgage insurance; you can now use that last 10% on another investment and possibly make yourself more money than the mortgage insurance costs.
The biggest con to buying mortgage insurance is the fact that your price per month and the overall price of the home are going to be more than if you paid a higher down payment. The exact amount that it will cost you extra will depend on the kind of mortgage insurance the loan has and the rates applied to it.
So, there you have it, mortgage insurance: what it is and why you need it. For more information about the home buying process, mortgages, and the minutia of real estate, keep tuned into our blog or call one of our amazing agents over here at the Hughes Group! They are experienced real estate agents with training coaching that make them the best in Boise! So, call today and discover what the Hughes Group can do for you.