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For generations, an immovable aspect of the American Dream has been homeownership. It’s true that owning your own home promotes equity and helps families build generational wealth, so it makes sense that people want to achieve this goal in life. When you throw in homeowners' freedom to transform their houses into perfect personal sanctuaries, there’s little doubt as to why this move is desirable.
Unfortunately, owning a home is also harder than ever before. A recent survey by Bankrate reports that more than 35% of participants thought they couldn't afford a down payment. Almost 40% claimed home prices were too high.
Why do people believe they can't afford the first installment for a home purchase? One reason is the myth that minimum down payment percentage rates must always be 20%. While that isn’t always the case, you could always combat this situation with private mortgage insurance.
Read on to learn more about mortgage insurance and how it can make your dream of homeownership more accessible.
If you're wondering whether a 20% down payment or upfront cash installment on a home is necessary, you're not alone. While people base that figure on industry standards, it carries many misunderstandings. For example, according to a report by the National Association of Realtors, the average upfront deposit for a house is only around 13%, but can go down to as low at 8%.
Did you know that some home loans require only 3%. Others need nothing at all. So, where did the belief about a 20% home purchase deposit come from?
Typically, people think they must put down 20% on the house because that's the minimum deposit amount lenders require if you don’t have mortgage insurance.
Let's say you want to buy a $400,000 property. Your down payment would be a minimum of $80,000 without mortgage insurance. That price would be difficult to save for many people, especially during periods of high inflation.
However, the good news is that you don't have to put down the whole 20%. Many home loans have lower minimum initial payment requirements that include private mortgage insurance.
In short, mortgage insurance is popular because it allows you to pay less upfront with a conventional home loan. It also offers more flexibility regarding payment.
It is a form of financial protection for your preferred mortgage lender in the event of loan default for any reason. If you fail to pay your mortgage, the lender can file a claim with your private mortgage insurer to recoup most, if not all, of their money after reselling the property.
Your lender won't require you to have mortgage insurance when you put the expected 20% deposit down on a property because that upfront payment is substantial enough not to warrant a greater assumed risk. If you want to buy a house with a conventional loan that doesn't have government backing, you'll likely need mortgage insurance if you want to pay less than 20%.
Lenders use the loan-to-value ratio to determine lending risks and approve home loans. High loan-to-value ratios indicate a greater risk for the lender, so they may increase the mortgage interest rate to compensate. They could also require mortgage insurance to protect themselves from loss if the borrower defaults on the loan.
You'll need mortgage insurance if you want to invest less into your new home's first payment. Since you're paying less upfront, the lender will take on more risk with the loan. Depending on the type of private mortgage insurance you buy, you could pay a monthly fee with your mortgage payment or pay a lump payment when you initiate the mortgage.
Sometimes, mortgage insurance lasts for the entire duration of a loan. However, most homeowners can request a cancellation once their property reaches at least 20% equity.
Though you would pay for the mortgage insurance and reap the benefits of the flexibility it offers, it will not provide financial protection to you in a traditional sense. In other words, if you don't make your monthly loan payments or fall behind, your property could go into foreclosure.
Mortgage insurance typically falls into three categories:
Private mortgage insurance and mortgage insurance premiums are similar products, but they do different things.
Any down payment under 10% will require a mortgage insurance premium, which is permanent mortgage insurance (it’s covered until you’ve fully paid off your mortgage). If your preliminary payment is 10% or more, lenders usually don’t require you to continue with the mortgage insurance premiums after 11 years.
Mortgage insurance premiums work similarly to borrower-paid mortgage insurance in that they both require monthly payments over and above the mortgage monthly repayment portion. You'd also pay a one-time upfront payment (around 1.75% of your loan amount at closing), which depends on your down payment amount.
Despite the extra expense of a mortgage insurance policy, the obvious upside is that it grants you greater access to homeownership. With the rising cost of housing, this is valuable. It is possible for you to invest in a low-down-payment or no-down-payment loan with mortgage insurance to help even the playing field.
Here are the other advantages of a lower down payment thanks to mortgage insurance.
One of the biggest assets you can have is a piece of real estate, and homeownership is equally an investment and a place to live and make your own. Since it can take many years to save enough for a large down payment, it’s easier to save yourself the trouble. If you take out mortgage insurance, you can become a homeowner faster and start building equity and personal wealth sooner.
Your home will appreciate, which increases the property's equity. By getting into the real estate market early using a small down payment, you can let the value of your investment grow and offset the cost of your loan's interest rate.
Paying 20% or more upfront for your house will result in lower interest rates and monthly mortgage repayments. However, unless you have substantial savings and can afford to make such a hefty down payment, that initial payment might not leave much for other things. You must consider everything from home improvements and repairs to emergencies when purchasing a house, and a smaller down payment can give you breathing room.
The price homeowners pay for private mortgage insurance depends on several factors, including the following:
The average cost to insure a conventional home loan is 0.46% to 1.5% of the loan amount. The smaller your initial payment and the lower your credit score, the more your mortgage insurance premiums will be.
For many people, becoming a homeowner is one of their ultimate life goals. Unfortunately, the rising costs of homeownership and everyday expenses make it hard to afford their projected down payment amount. Though the common assumption is that everyone must make a 20% minimum initial investment, prospective homebuyers can put down much less by looking into mortgage insurance coverage.
This mortgage-related insurance provides protection to the lender or borrower and reduces the down payment amount the borrower has to make. It’ll be easier to buy a home this way, even if you haven’t saved enough for the expensive 20% down payment. Mortgage insurance benefits are also plentiful, especially for low-income and first-time homeowners.
If you're ready to invest in your future with mortgage insurance and a new home, turn to Insurdinary. We make it easy to compare the best quotes from top insurance agencies to help you save time and effort in your search for the best insurance products and rates. Our streamlined process makes it easy for anyone to find a reputable insurer and apply for coverage.
Start your homebuying journey with mortgage insurance and lower your down payment—contact Insurdinary online for your free quote!