Mortgage insurance: a solution for cash-strapped homebuyers.

• Position: How-To GUIDE

If you're thinking about buying a frame--but don't have a lot of money for a down payment--mortgage insurance could be the answer.

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Mortgage insurance shouldn't be confused with mortgage life insurance (which pays off your mortgage in the event of your death) or homeowner's insurance (which protects you in the event of fire, theft or other disaster). In the simplest of terms, mortgage insurance insures mortgage lenders against borrowers defaulting on their mortgage. This insurance compensates the lenders or investors for losses due to default.

With mortgage insurance, qualified buyers can put as little as 5 percent down on the purchase price of their new home. The homebuyer's lender actually pays the premium for the mortgage insurance--but usually, the price of this premium is added to the homebuyer's monthly mortgage payment. The average cost on a $100,000 property is about $60 per month. This cost can be higher or lower, based on how much the homebuyer had as a down payment and other factors, including the terms and type of mortgage.

One of the main reasons mortgage insurance exists is because financial institutions realized long ago that the average homebuyer doesn't have 20 percent, of most homes' value to use as a down payment. In today's market, this 20 percent usually amounts to $20,000 to $40,000 for most homebuyers. Since the numbers of potential homebuyers who have this amount are limited, lenders recognize the need to try to expand home buying activity while minimizing risk. So, if a home does go into foreclosure, and mortgage insurance is in place, lenders aren't hit with huge losses as a result.

Mortgage insurance can be found from the public or private sectors. On the public side, the Federal Housing Administration and the United States Veterans Administration both offer insurance on mortgages. It's important to note that these government-sponsored programs carry restrictions that can make it difficult to qualify for a mortgage.

Homebuyers who carry mortgage insurance are not required to keep this for the life of the loan. In fact, the Homeowners Protection Act of 1998 stipulates that mortgage insurance can generally be cancelled under one of two conditions:

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* When the ratio of the loan's actual or scheduled principal balance of the home's original value equals 80 percent. In order to cancel the insurance at this time, the homeowner must send a written request to the lender...