What is Mortgage Insurance

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Mortgage insurance is a type of financial guarantee for the lender in case of a default by the borrower. It lowers the risk, if not completely eliminating it for the lender. It is the most common form of loans where there is equity of less than 20%. This basically implies that if you are planning to purchase a new home with a down payment of a meager 20% of the total payment you will be required to pay the mortgage insurance.

The next question popping up in your cerebrum will be “why do I need to pay the mortgage insurance?”. Well, it is pretty simple- without paying the mortgage insurance the risk- averse lenders won’t be willing to give you money to purchase your new house. While you would feel that mortgage insurance is of no advantage to you but the story says that to get your loan approved you need to pay for the mortgage insurance.

Wait! There is also a brighter picture to this story. Paying for the mortgage insurance displays the buyer stronger than the lender, that is, the buyer can negotiate with the lender asking him to reduce the already reduced down payment. This also provides the borrower with some tax advantages as he will be barred from paying a higher rate of interest for his loan.
People often mix up the terms mortgage insurance and mortgage life insurance. The latter is different from mortgage insurance as it deals with events of the death of the borrower. It also insures the borrower against the natural calamities like floods, tsunami etc.

Thus, if you have enough savings to shell out a decent down payment for your new home, you should not pay the mortgage insurance. But if you are going through tough times and can only afford a low down payment, you should start looking for some mortgage insurance quotes.