With mortgage insurance, lenders are more willing to write buyers a mortgage.
The mortgage industry rule of thumb is that if you pay 20 percent down, you have enough skin in the game that you'll keep paying the mortgage. If you have a smaller down payment, it might be easier to walk away. If you do, private mortgage insurance covers the lender's losses if foreclosure doesn't wipe out the mortgage. You pay a monthly premium based on a percentage of the loan amount. The percentage varies with the size of your down payment and the length of your loan.
With an FHA loan, you pay two premiums. The up-front premium, equal to 1.75 percent of your loan, is due at closing. You can have the bank add it to your loan, then pay it
off over time, but you then have to pay mortgage interest on it. In addition to the up-front charge, you have to pay a regular monthly premium. As with PMI, it's a percentage of the mortgage loan amount.
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