For prospective borrowers who plan to put less than 20% down on their new home, such as taking an FHA loan that only requires that you put 3.5% down, you will be required to purchase what is known as ‘mortgage insurance.’ This is essentially a monthly insurance payment that protects the lender against you defaulting on the loan, and will need to be paid monthly until you have established 20% equity in the home. For borrowers choosing a long mortgage loan term, that can be a lot of payments! Think about it: if you have only put 3.5% down on the home, it will take you 5 years to reach 20% equity!
However, there are a few ways to avoid having to pay mortgage insurance. Sometimes, for borrowers with incredibly high FICO scores (think: high 700s), the lender may waive the requirement for mortgage insurance due to your high creditworthiness. You can also consider enticing lenders by offering to pay a much higher interest rate, the potential profit of which will offset the increased risk to the lender. Or, finally, you can just put 20% down up front.
Whatever you think might be best for you, be sure to talk to your loan officer as they will have advice and recommendations specific to your situation that will help you get the best deal possible.
