Taking a risk is something we are all familiar with in life. Whether you take a risk by accepting that new job offer or by going sky diving as a thrill seeker, it is a risk. Just as we take risks in our personal lives mortgage lenders also take risks when lending money to their customers. As a way to mitigate the risks that comes with lending such a large amount of money, lenders usually charge a fee, or mortgage insurance, when a lender puts less than 20% down on a home loan. There are some loans that start out with a mortgage insurance premium and then can be removed over time, some loans however require the mortgage insurance to be paid throughout the life of the loan. The cost of the mortgage insurance can vary depending on the type of loan that is acquired.
Why Do We Require Mortgage Insurance?
At one time it was common for people to have the 20% down payment that was needed to put down on a house loan. As the economy changed over the last 50 years, that became less feasible for many people looking to own a home therefore it discouraged many to pursue home ownership. With the creation of the Federal Housing Authority (FHA) came the option to borrow with less than 20% down. This also made lending mortgage loans with less than 20% down riskier to lenders. Because of this risk to the mortgage lenders, they began charging mortgage insurance to borrowers (which is usually about one percent of the loan amount per year). By charging mortgage insurance to the borrowers putting less than 20% down, it reduced the loss that the lenders […]