Is Home Mortgage Insurance Necessary?

With all the costs involved with purchasing a home, home buyers may wonder if the added expense of home mortgage insurance is necessary. This insurance is not a legal requirement; however, if the home is financed, chances are it will be required by the lender. Mortgage insurance should not be confused with homeowners insurance. They are two entirely separate types of insurance. This insurance provides no protection to the buyer for the home, but covers the interest of the lender should the buyer default on his loan payments. Even though lenders typically require insurance on the mortgage, there are certain instances where home buyers may be able to forgo purchasing home mortgage insurance.

When insurance is needed

If the home owner makes a down payment that is less than 20 percent of the total purchase price of the home, the mortgage lender will require the buyer to take out a home mortgage insurance policy. This insurance protects the lender should the borrower default on the mortgage loan. If the buyer is making a substantial down payment of at least 20 percent of the home's purchase price, this insurance will not be required by the lender unless the borrower is a poor credit risk. In this case, the lender may require the buyer to purchase mortgage insurance, even if he is making a 20 percent or larger down payment on the home.

Types of home mortgage insurance

· Public insurance: The Federal Housing Administration provides public insurance for mortgages, which is available at a premium of 1 percent of the loan closing amount. In most cases, this premium is financed by the lender, who in turn, pays the insurance premium to the FHA. Public insurance for mortgages is offered for home finance through the FHA. A similar program exists for home mortgage insurance for home that are financed through the United States Veterans Administration.

· Private insurance: Private mortgage insurance, or PMI insurance, is not provided by the government but by private insurance companies. Insurance premiums can range between 5 and 6 percent of the principal loan balance. The premium can be paid in a single lump-sum payment, annually, or in monthly installment payments that are added onto the monthly mortgage payments. Borrowers are allowed, by law, to request cancellation of PMI insurance when the mortgage loan balance is less than 80 percent of the home's value.

Are there alternatives to this type of mortgage insurance?

There are ways of avoiding paying for insurance for mortgages altogether. The easiest way to avoid paying it is by saving money until the buyer can make at least a 20 percent down payment on the purchase of a home. This may delay home ownership, but purchasing a home with a higher down payment may allow the buyer to obtain a lower interest rate as well as saving by not having to purchase the insurance.

There are also mortgage loans available that are called "No-PMI" loans. Insurance on the mortgage is still provided, but the cost is paid by the lender and not the borrower. Interest rates for these types of loans usually come at a higher interest rate than traditional mortgage loans.

Getting advice about insurance

If home buyers are still unsure about what the options are in purchasing insurance for a home mortgage, they can consult with a Certified Mortgage Planning Specialist (CMPS). A CMPS has financial planning expertise in all areas of mortgages, including home mortgage insurance. Mortgage brokers and real estate agents also have a broad knowledge base regarding mortgage insurance requirements and may be able to advise buyers as to their best options regarding purchasing mortgage insurance.

If a home buyer does not have the financial ability to make at least a 20 percent down payment, there may be no way of getting around purchasing home mortgage insurance. This insurance does have some advantages. It is one way first-time homebuyers who do not have a substantial amount of money for a down payment can afford to purchase a home. Even if it turns out that home mortgage insurance is required; as the home owner pays down the mortgage, he will eventually be able to cancel the insurance required by the lender.

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