MORTGAGE INSURANCE

  Here is topic everyone loves to hate-mortgage insurance.  While mortgage insurance may seem to be an unnecessary expense on a monthly mortgage payment-let's take a look at what mortgage insurance is, and what it does.

  Back in the old days-the really old days-if you wanted to purchase a home, the banks required you to put 20% of the purchase price down. That is a lot of money for a young family to save.  So at some point someone got the brilliant idea of insuring the lender for the portion of the loan between 80% and 100% of the value of the property, thereby removing risk and allowing borrowers to put less money down. Fantastic!

  In essence-what you are paying in mortgage insurance allows you to put less than 20% down on a home. I kind of look at it as paying your 20% over the long term-well, you will pay more than your 20% overall but how long will it take to save that 20%? How much rent do your pour down the drain waiting to save the 20%.  How much in tax deduction do you lose?

  The only other option to mortgage insurance or putting 20% down is to obtain a second mortgage for 10% of the down payment.  So you as the buyer would have 10% of your own money and 10% of borrowed funds to supply the down payment. So if you are thinking of purchasing a $100,000 home you will need $10,000 of your own.  If we compute what you will pay in mortgage insurance by putting 5% down, the mortgage insurance will be retired in 114 payments costing you $8032. (at $70.46 per month)  If you save a another 5% for down payment and obtain a second mortgage for 10% of the down payment at $53.68 per month (180 month term at 5%) you will spend $9662 assuming you don't retire the second mortgage early. Hmmm. Maybe mortgage insurance isn't such a bad thing after all.

  I prefer to look at mortgage insurance as a method of saying "yes" to borrowers rather than a ball and chain they drag along every month when they make their house payment. The added expense is annoying but without it, there would be a lot of people who might never be able to buy a home.