Mortgage insurance is an insurance policy that protects the lender if the buyer defaults on a home loan. This insurance policy is required on conventional mortgage loans any time that the down payment or equity position is less than 20% of the value or purchase price of the home. While this option adds expense to the monthly payment, it allows someone to buy a home with a smaller down payment which may have prevented them from buying anything at all!
The cost of mortgage insurance for conventional loans hinges primarily on the equity position and the borrower’s credit scores. In other words, if you put 5% down you’ll pay more per month than if you put 10% down. And if your credit scores are under 680, you’ll pay substantially more per month at 10% down than if your scores are over 740 with the same amount down.
Once you have paid down your loan balance enough and/or gained equity simply because the home market appreciated enough to get to get your equity above 20%, you are eligible to have your mortgage insurance policy cancelled. This does require an appraisal typically, but the cost to do so will save you money over time.
If a borrower’s credit scores are good (over 740), mortgage insurance on conventional loans is relatively inexpensive. For instance, on a home with a purchase price of $300,000, the difference in mortgage insurance between putting 5% down and 10% down is about $35 a month. Meaning that in this scenario it may be more advantageous for the borrower to keep the extra $15,000 in their savings account and pay an extra $35 a month.
No one loves paying mortgage insurance, but it does make it easier to get into a home without saving up money for years. Plus once you are in your new Idaho home you can take advantage of your new home’s appreciation and improve you overall net worth.