By Virginia

Paying for health insurance doesn’t necessarily mean you’ll stay healthy. But if you do get sick, you know at least some of your medical care will be paid for. Paying for mortgage insurance, on the other hand, doesn’t help you out if you have a problem paying the mortgage – it helps your bank. If you go totally rogue and default on the mortgage, your bank will be able to recover some of the loan amount from the insurance company. (Plus, the bank can foreclose on your home and recover even more of the loan amount when they sell it.)

Mortgage insurance typically only comes into the mix when a borrower is putting less than 20% down to buy a house or condominium. Here’s how it works; this 2012 pamphlet is actually geared towards lenders but it’s one of the clearest explanations I’ve seen (PDF may take a minute to load).

If you’re only putting 10% down, the mortgage insurance (PMI) has to be for 25% of the purchase price in order to satisfy the secondary investors like Freddie Mac or Fannie Mae. So…do the math…the total loan is for 90% of the purchase price, so your bank would be on the hook for 67.5% of the purchase price, if you defaulted right away.

What the monthly premium will actually cost you is based on a combination of factors including your loan amount, your loan-to-value amount, and your credit score. For a $400,000 house with 10% down (a loan of $360,000) if you’re down around a FICO score of 700, you’d be looking at monthly PMI payments of $186 on top of your principal and interest (and property taxes and hazard insurance)! This is where having a credit score like 760 or higher really helps you.

For more details on mortgage insurance, contact Lance Morgan at Windermere Mortgage Services. He can walk you through it, and also explain the ways it can sometimes be worked around. And of course he can help you get a mortgage as well.