There are two primary mortgage types: fixed-rate mortgages and adjustable-rate mortgages. The mortgage industry offers varieties within these two categories, but the first step is always to determine which of the two loan types best suits your needs.
Private mortgage insurance (PMI) is a type of insurance that a lender may require a borrower to purchase as a condition of a mortgage. This insurance lowers the risk to the lender when offering a loan to a borrower. Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. Mortgage insurance allows borrowers to qualify for a loan that they may not have otherwise been able to secure.
Mortgage insurance ultimately protects the lender in the event that the borrower falls behind on their payments. If a borrower does fall behind, it may affect their credit score and may cause home foreclosure. Mortgage insurance will increase the cost of your loan as the insurance payment will be included in your total monthly payment.
Mortgage insurance ultimately increases the cost that borrowers have to pay on a monthly basis, but it does enable borrowers to become homeowners sooner by reducing their risk to lenders. Homeowners insurance is a worthwhile option for borrowers with a smaller down payment who want to own a home quickly.