During the subprime boom, most home buyers stood clear of mortgage insurance, even while getting 100-125% financing on their home. Now a lot of them are facing foreclosure and wished they had digged deeper to find out the pro's and con's of Mortgage Insurance. However, with the collapse of the subprime industry, anyone purchasing or refinance that are borrowing 80% Loan-to-Value are higher, don't have a choice and are required to get Mortgage Insurance.

What is the purpose of Mortgage Insurance? Simply put, this type of insurance will pay the lender back in the even the home owner defaults on the mortgage.

Now let's look at the benefits that mortgage insurance has to offer for the borrower. Mortgage insurance allow First Time Home Buyers that don't have or don't want to put down a large 20% down payment but instead 3-5% down payment, while at the same time reducing the risk for the lender. Now that's a big chunk of change to keep in the borrower's pocket, which can be used towards closing cost, remodeling house, or an emergency fund etc. The average home price in my neck of the woods in Florida is about $200,000. So that means a first time home buyer would need to have at least $40,000 as a down payment, if they were considering buying a home and lets not forget there is closing cost associated with the loan, but I will leave that topic for another article.

Mortgage insurance is usually about 7% of the monthly payment, which also makes it an affordable option. Most lenders are flexible and allow the borrower a few different payment options such as, either adding it to your monthly mortgage payment, which seems to be the most common, or paying it in a lump sum which would be included in your closing cost at the time of closing and also the option to have it financed into the loan. I am seeing this last option of having the mortgage insurance financed into the loan become more popular recently, as it offers more tax benefits.

Now let's look at each option in greater detail.

- Monthly Mortgage Insurance Payment Option- You will pay this insurance premium each month, when you receive you monthly mortgage statement, it will have the following break down. Principal and Interest amount, tax, insurance, and mortgage insurance. You will be required to keep this insurance premium on the loan until the loan reaches a 78% loan to value and you have paid the loan on time for the last 12 month.

- The Lump Sum Option- this allow the borrowers to pay the full premium for the duration of the loan instead of monthly, and also some lenders now allow for this lump sum premium to be financed into the loan.

- Lender Paid Mortgage Insurance – Typically what you will find in this situation is that the lender will charge a higher interest rate and in return cover the cost of the mortgage insurance premium. The benefits of this option are that this type of loan will come with lower out of pocket closing cost and great tax advantages.

Mortgage Insurance when properly understood is more a friend that a foe, and I see it everyday as south Florida home owners who face foreclosure, wished they had mortgage insurance on their side.

Mortgage Insurance has opened the doors for many cash strapped renters and has helped them realize the dream of home ownership. When choosing a mortgage whether it's for a purchase or refinance, it is important to work with a mortgage expert that can explain the different options that will benefit you the home owner.