For a long time, most home mortgage lenders required people to put down a 20% downpayment when buying a home. They did this in large part to make sure that a homebuyer had a stake in a house in the form of home equity so that they would be less likely to default on their mortgage payments.
But in more recent years, some mortgage lenders have stopped requiring 20% downpayments. They’re OK with people putting down less than 20% as a downpayment on a house, as long as these people are OK with taking out a lender’s mortgage insurance policy.
Lender’s mortgage insurance is a type of insurance that homeowners will be asked to obtain when they don’t put 20% down on a house. It protects lenders in the event that homeowners don’t keep up with their mortgage payments.
So, should you take out a mortgage insurance policy? There are a few instances in which it might make sense. Here are three reasons to consider getting mortgage insurance.
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1. You Can’t Afford to Put Down 20% on a House
Buying a home can be very expensive. Even if you’re only purchasing, say, a $300,000 home, you’re still going to be expected to plop down $60,000 for it before you even get the keys for the house.
If you don’t have an extra $60K lying around, you might only be able to put down 5, 10, or 15% as a downpayment on a home. And this is going to put you in a position where you’ll have to secure a lender’s mortgage insurance policy.
It’s worth noting that this is not the end of the world. Although paying for mortgage insurance might not always be ideal, you should look at it as the fee that you’ll be paying for the right to buy a home without putting a full 20% down.
You should also remember that you won’t need to carry a lender’s mortgage insurance policy forever in most cases. You should be able to ask to get out of it once you’ve built up enough home equity in your house.
2. You Don’t Want to Put Down 20% on a House
When you first buy a house and move into it, there are some things that you’ll probably want to do to make it your own. For instance, you might want to update the kitchen, add an extra bedroom or bathroom, or finish off the basement.
Whatever the case, you’re going to need to prepare to spend some money on a home after moving into it. And that might make you rethink the idea of putting down a 20% downpayment.
In this situation, you may be better off putting down less money so that you have money on hand when it’s time to work on your new house. You might also want to see how much a lender’s mortgage insurance will affect you in a financial sense each month.
This LMI calculator can help you figure out what you’re going to have to pay for lender’s mortgage insurance each month if you’re required to get a policy.
3. You Want to Take Advantage of a Special Home Buying Program
There are a lot of different programs available to those who are interested in buying a home soon. More specifically, there are programs that will make it possible for those purchasing a home for the first time to do it.
Many of these programs will provide people with money toward downpayments. But they’ll also call for people to get lender’s mortgage insurance policies since many lenders will see these people as riskier than others.
You should look into these programs more and see if you might be able to qualify for one. You should also see if these programs will force you to get mortgage insurance so that you understand what you’re getting yourself into when buying a house.
How to Get a Lender’s Mortgage Insurance Policy
If you need to get a lender’s mortgage insurance policy, your lender might be able to recommend one to you. They’ll probably have a good working relationship with an insurance company that specializes in this type of insurance.
But with that being said, you shouldn’t feel like you have to go with the insurance company that your lender suggests. You can also shop around for a mortgage insurance policy and try to get the best deal possible on it.
The cost of a lender’s mortgage insurance policy is going to depend on a variety of factors, including the price of your home, how much money you’re putting down on a home, etc. But after doing a little digging around, you should be able to locate a policy that will work with your monthly budget.
From there, you’ll need to coordinate things with your lender so that they’re able to take care of the costs associated with your mortgage insurance by using your escrow money. It’ll ensure that you have an active policy at all times that covers both you and your lender.
Find Out If You’ll Need to Obtain Lender’s Mortgage Insurance
Not everyone is going to need to get lender’s mortgage insurance. If you’re putting down at least 20% when buying a home, you should be able to steer clear of it.
But if you aren’t able to put down 20% for whatever reason, that’s when a lender’s mortgage insurance policy will become a necessity. You’ll need to begin looking for a policy ASAP so that you have the correct coverage in place after moving into a home.
Get more tips on buying a home and insuring it by browsing through our other blog articles.