When you’re in the market for a new home in Riverside County or Orange County, California, there are a range of expenses that you’ll need to take into account. One such expense comes in the form of mortgage insurance, which is a type of insurance policy that’s designed to protect mortgage lenders in the event that the borrower passes away or defaults on their payments. Before you apply for a home loan, you should understand what this type of insurance is.
How Does Mortgage Insurance Work?
When you obtain one of these policies, you may be required to pay a monthly premium for the insurance. This premium could also come in the form of a lump-sum payment that you would need to pay when you first obtain the loan. If you are required by your lender to have a PMI policy, you can seek cancellation of the policy once you’ve paid off 20% of the initial loan balance.
Insurance Types Available to You
There are two main types of insurance that you can select from: PMI and MIP insurance. A PMI policy is oftentimes necessary when you apply for a conventional loan. As mentioned previously, you will need to obtain this type of policy if your down payment is less than 20% of the home value. As for MIP insurance, this policy is necessary when seeking an FHA loan that’s backed by the Federal Housing Administration. Keep in mind that MIP insurance must be purchased by anyone who is granted an FHA loan. Even if you make a 40% down payment, MIP insurance would be necessary.
While many homeowners are required to obtain this type of insurance from mortgage lenders, there are ways to avoid the insurance, which will help you keep your monthly payments down. Certain states offer programs to first-time homebuyers that significantly reduce or eliminate the insurance requirements. If you obtain a conventional home loan with the help of a mortgage broker, you can avoid paying for this insurance by making a down payment that amounts to 20% or more of the asking price.
Mortgage insurance can be very helpful to prospective homeowners who can’t afford to make a large down payment. If you purchase this type of insurance, you could obtain a home loan with a down payment that’s as low as three percent. Consider seeking assistance from a mortgage broker if you want to get favorable terms with your loan.