Deciding to purchase a home is a major decision and potentially a great risk. In the event that you have any problems you could end up ruining your credit rating or worse yet you may have to file for bankruptcy and loose your home all together.

Fortunately there is an insurance policy that will protect you if you ever find yourself either out of work or unable to work.

Private mortgage insurance is a type of insurance policy that helps protect the Mortgage Company against losses due to foreclosure. This protection is provided by private mortgage insurance companies and allows mortgage companies to accept lower down payments than would normally be allowed.

This is very important for low and middle-income people. Normally you need to have a down payment of 20% of the value of the home in order to obtain a mortgage. With private mortgage insurance you may need as little as a 3% down payment to obtain a mortgage. With the help of private mortgage insurance you will qualify for normal mortgage as the banks investment in you is secured by the insurance policy. Private mortgage insurance may be also required when buying a second home or refinancing an existing mortgage with cash out.

Low down payment mortgages are becoming more and more popular. Mortgage insurance allows borrowers to purchase a more expensive home than they might otherwise be able to afford. With lower down payment you retain more for home furnishings, or buying a car or other investments.

Typically, a portion of the mortgage insurance premium is paid up front at closing, and the rest is paid as part of the monthly mortgage payment. Under an annual plan, a borrower pays the first-year premium at closing. A monthly plan allows homebuyers to only pay 1 or 2 month’s mortgage insurance premium at closing. With single premium plan a borrower need to pay a one-time single premium.

Some mortgage insurance plans allow you to add the amount of the mortgage insurance premium to the loan amount. In that case borrowers make no mortgage insurance payment at closing and the first insurance payment is made with the first mortgage principal and interest payment.

It may be possible to cancel private mortgage insurance at some point. Typically three conditions must be met before the policy can be cancelled.

* Paid down the mortgage up to 80%.
* Made structural improvements that increase the value of the home.
* The homes in the neighborhood must have significantly appreciated in value.

The law in certain states requires that mortgage insurance be cancelled under some circumstances. Because of the wide variation in lender, investor and state requirements, you must find out the specific requirements for cancellation before you commit to paying for mortgage insurance. Remember that mortgage insurance should not be confused with mortgage life insurance, which is designed to pay off a mortgage in the event of the borrower’s death.

Are there other options?

There are ways of both avoiding private mortgage insurance and achieving a smaller than 20 percent down payment. Many lenders offer a loan called an “80/10/10.” Instead of one loan, you get two. You’ll have a first mortgage of 80 percent of the home’s value, a second mortgage of 10 percent of the home’s value, and you’ll make a 10 percent down payment. Some lenders may even offer an 80/15/5.

This may seem bizarre, since you’re still borrowing the same amount of money, but the lender in the “first position” is only on the hook for 80 percent, which is less of a risk than a higher amount. Also you get the small down payment and the tax-deductible interest. In addition, the total monthly payments are often smaller than one larger loan with private mortgage insurance.

The other way out is to get a loan that builds the private mortgage insurance into the interest rate. In this case, you agree to pay a higher interest rate in exchange for the lender loaning you more money than they normally would. It can be a nice compromise as the interest is tax deductible and it’s simpler than doing two loan transactions. The key here is comparison. Ask your loan agent to run some numbers for you on an 80/10/10 and a loan with built-in private mortgage insurance to see which one will cost less.