How mortgage insurance works
Normally, a lender (typically a bank) requires a 20% down payment because he wants to limit his total risk to 80%. The principle is that people who pay a larger down payment are less likely to renege on their monthly payments, since they have already made a large commitment. The ability to make a 20% down payment is also seen as an indicator of ability to pay. If you take mortgage insurance, you give a lower down payment (ex. 12%) and the insurance company will pay the difference between that and the required minimum of 20% (ex. 8%). In effect, they share your loan or the price of your monthly premiums. Your mortgage insurance is rolled into the mortgage payment and listed separately on the mortgage payment papers, along with property tax and homeowner's liability insurance deductions.
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