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home in handsBuying a house for the first time―or even not for the first time—can be an extremely daunting task, and it can be hard to know what you need to do in order to set yourself up for success as homeowner. One thing that many soon-to-be homeowners wonder about is mortgage insurance. Here is a look at mortgage insurance is and what it means for you as you seek to own a home.

Ideally when you’re buying a home, you’ll put down at least 20% of the total home value as your down payment. This can be a barrier to homeownership for many homebuyers, however, and that is where mortgage insurance comes in. With mortgage insurance, many lenders will not require that 20% down payment when making home loans.

In general, mortgage insurance, also known as mortgage guarantee or home-loan insurance, is an insurance policy that will offset losses if a home buyer is not able to repay a mortgage loan. In other words, it will compensate the lender if a mortgage defaults and the lender is not able to recover its costs after foreclosure and sale of the property. Most conventional, non-government backed mortgage programs will require it when the down payment is less than 20% of the property value.

Mortgage insurance typically covers the top portion of the mortgage—usually about 25% or 30%. So, let’s also say that a home buyer puts 10% down on a $200,000 home. And let’s say that the mortgage insurance will cover the top 25% of the mortgage. After putting 10%—or $20,000—down, the home buyer borrows $180,000 to cover the remaining home value. After obtaining mortgage insurance for that $180,000 mortgage, the home buyer has reduced its exposure to loss from $180,000 to $135,000. The exposure to loss is now $135,000 since 25% of $180,000 is $45,000, and $180,000 minus $45,000 is $135,000.

Private mortgage insurance typically costs about $55 per month per $100,000 financed, but it can be as high as $125 per month. Your particular cost, however, will depend on the loan term, type, initial home equity, and frequency of payments.

It’s easy to see how mortgage insurance benefits home loan lenders, but you should also remember that mortgage insurance benefits home buyers as well. Mortgage insurance can allow home buyers to buy their homes sooner, as it allows home buyers to put less money down. Going along with this, mortgage insurance can also increase your buying power, helping you afford more home with the money you have available for a down payment. It can also let you keep some of the money you initially planned on using for your down payment, allowing you to put it to other uses like investments, an emergency fund, etc. Many mortgage insurance plans can also be canceled when they are no longer needed.