What is Mortgage Insurance?

• Mortgage lenders assess the default risk of each home loan. This is how they determine the interest rate on the mortgage loan. However, borrowers who purchase a home without a 20 percent down payment also have an increased default risk. Lenders have to protect themselves, and if there is less than 20 percent equity in a property, they charge mortgage insurance. The costs of this insurance varies.
  
  

Definition of Refinancing

• Mortgage refinancing involves paying off your home loan while remaining in your property, and getting a new mortgage loan to replace the original debt. You can refinance to select a different home loan lender, take cash from the equity or change the terms of your home loan agreement. While beneficial, completing a new home loan application and waiting for an approval from the lender can prove nerve-wracking. Lenders need to review your present situation. Credit or income issues can prevent a refinance.
  
  

Benefits of Home Equity

• The more equity you have in your property when refinancing the mortgage loan, the less likely you are to pay mortgage insurance on the new loan. Equity requirements vary, but you can refinance with only 5 percent equity. Because the amount of equity determines if lenders charge private mortgage insurance, it's wise to refinance after you've built 20 percent equity or consider putting a down payment on the mortgage loan to eliminate mortgage insurance.
  
  

Refinancing with a Down Payment

• There are multiple options for paying your lender a down payment. Schedule a home appraisal to assess how much equity you have in the property. If the appraisal comes in short of 20 percent equity, make up the difference. For example, 15 percent equity in your house only requires a 5 percent down payment to get rid of mortgage insurance.