What is Mortgage Insurance, and how can we avoid paying it?

Let's start with a little history. It used to be customary in the housing market for purchasers to apply a down payment of at least 20% of the value of the home being purchased in order to procure ownership of the home in question. A sizable down payment was required by the lender in order to dissuade a purchaser from walking away from the investment if anything went wrong with the home (i.e. burst water pipes, bad septic etc.). They would be more apt to fix it than to leave it, because they had so much money tied up in the home that it would be difficult or impossible to walk away leaving the lender holding the bag so to speak...

Why twenty percent and not fifty percent or ten percent?

In the case of a foreclosure, 20% of the value of the home was thought to be enough money to cover any repairs, back taxes, and realty fees that it would cost to get the house back on the market and sold again before the lender would lose any money on it's investment. Hopefully the purchasers would have owned the home long enough for the house to appreciate a little in value, thus creating an even bigger equity cushion that the lender use to make the new price more tantalizing to a new prospective buyer allowing for quicker sale.

Later, the advent of credit reporting gave the lenders a better picture of a borrowers ability to pay, and lenders were able to more easily discern "good" risks from "bad" ones. As a result many lenders eased lending requirements for people with "good" credit...

Lenders no longer required that a 20% down payment be paid by the borrower, but rather that the borrower pay on an insurance policy procured by the lender to cover that amount of money that the borrower borrowed that is over 80% of the value of the home

(I.E. If a home is worth $100,000.00, and the borrower borrowers $90,000.00, then the loan to value ratio would be 90%. That is the house costs $100,000.00, the lender lends $90,000.00, and the borrower is only required to put $10,000.00 or 10% as a down payment.) In this case the lender would loan $80,000.00 with no problem, however, in order for the lender to loan the full $90,000.00, the lender would require that an insurance policy be taken out to cover the remaining $10,000.00 of the loan in case of foreclosure. No insurance would be required up to 80%, and the insurance only covers that amount loaned over 80% of the value of the home.

This insurance

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