Mortgage Insurance (MI)

An insurance contract that protects the lender against loss if a borrower can not repay a loan

If your down payment (or equity) is less than 20%, a lender will require you to buy MI. This is a lender’s safety net in case you default on the loan and the lender forecloses on your property. The lender will use the money collected from MI to offset any losses.

How much you need to pay each month in insurance depends on the loan amount, the type of loan and the downpayment. Typically, it costs between 0.15%, to 2.5% of the loan amount. You might also have to pay one or two months worth of payments when you close on your home.

The good news is that you may not have to pay MI forever – some lenders let you end the policy when, based on an appraisal, you show a lender that you have at least 20% equity in your home. MI is also called Private mortgage insurance (PMI).

See: Insurance, Foreclosure, Appraisal/Appraiser, Down payment

Loan

A sum of money that a lender gives to a borrower that must be repaid along with interest

There are many types of loans to choose from when you are looking to buy a home. Each loan will have a different interest rate and term, which will affect how much you have to pay each month. How much you put towards a down payment will also affect your monthly payment. The three most common types of loans are fixed rate, adjustable rate, and balloons. A home loan is also called a mortgage.

See: Fixed rate mortgage, Adjustable rate mortgage, Balloon mortgage

Beneficiary

A lender who loans you money to buy a home

A lender, usually a bank, is called a beneficiary in certain states. The beneficiary holds onto the deed of trust, which acts as a guarantee that you will repay your loan. If you fail to pay your loan (default), the beneficiary can give the trustee - the neutral third party who acts on behalf of the beneficiary - permission to foreclose on your property.

See:Deed of Trust