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Mortgage Insurance
Explanation:
Also known as Private Mortgage Insurance, or just PMI, mortgage insurance protects lenders against financial losses caused by a borrower's inability to pay off a home loan. Federal law requires mortgage insurance for any home loan with a Loan-to-Value (LTV) ratio above 80% because borrowers who are unable to place a down payment of at least 20% are considered to be especially at risk of default.
While lenders are the ones who benefit from mortgage insurance, they typically require borrowers to fit the bill and factor it into the loan's monthly payment or ask for a lump-sum payment upfront. Borrowers may request that a mortgage insurance plan be cancelled once they've paid off 20% of their home's value, but lenders reserve the right to require it until the borrower reaches 50% equity.
Our Thoughts:
It's somewhat risky to purchase a home when you're unable to place much of a down payment because that's a clear sign that you might not truly be able to afford it, especially since your monthly payments will be higher than they would be otherwise. Besides, by borrowing more you're just costing yourself money in the long run given that a great value will accrue interest.
With that being said, there are a number of loan programs that make purchasing a home with a relatively low down payment affordable. Examples of such programs include Federal Housing Administration (FHA) loans, Veterans Assistance (VA) loans, United States Department of Agriculture (USDA) Rural Development loans.