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What exactly is Mortgage Insurance?
Lenders require Private Mortgage Insurance
on most conventional mortgages because experience reveals a
strong correlation between borrower equity and default. The
less money a borrower has invested in a home, the greater the
probability of default. Thus, private MI is a financial guaranty
that protects lenders against loss in the event that a borrower
defaults. Without that financial guaranty, lenders will
typically require a down payment of at least 20 percent.A
recent study notes that first-time homebuyers in 1994 spent
three years saving for a down payment before buying. And when
they finally did buy, the average down payment was 13.7 percent.
Had they gone without mortgage insurance and saved for the requisite
20 percent down payment, these first-timers would have been
renting for a minimum of four-and-a-half more years. On the
flipside, had they been willing to put only five percent down,
they could have realized their homeownership dream in just over
a year.
By waiting and going with mortgage insurance, though, these
first-timers increased their buying power. For example, $5,000
is equal to a 10 percent down payment on a $50,000 home; but
it is also sufficient for a five percent down payment on a $100,000
home. Another scenario: $10,000 may constitute a 20 percent
down payment on a $50,000 home; but it can also provide enough
financial leverage to help qualifying borrowers buy a $200,000
home with only five percent down.
This is the value of private mortgage insurance
- it is the reason so many young families today can afford homeownership
despite earning and saving relatively less than their parents.
Unfortunately, some people continue to confuse private
mortgage insurance with mortgage life insurance.Private
mortgage insurance puts people in homes; mortgage life insurance
pays all or a portion of your mortgage in the event of your
death.
Consumers who understand this difference, understand how private
MI enhances their ability to realize their dream of homeownership.
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