Owning a home is a tried and true approach to building that elusive security for later life. Purchasing a home can be a significant step toward financial security.  However, analysts say it’s the equity you build in a home – not the house itself – that drives your prosperity.     Home equity can be used to fund significant life events such as retirement, a wedding or college costs. 

Equity is determined by the value of your home, less the balance of your mortgage.  If your home is worth $100,000 and your mortgage is $85,000, you have $15,000 of equity, or 15% ownership.    

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Some mortgages may offer low initial rates, but the lower payment is often achieved by deferring principal repayment – meaning you may not build equity for several years.
 
For example, five years after taking out a $100,000 mortgage, a borrower who deferred the principal and part of the interest would not only have no equity, but also would owe about $10,000 more than the amount originally borrowed.  A borrower who made interest-only payments would have no equity and would still owe the full loan amount.  However, a borrower with a 30-year fixed-rate mortgage whose payment includes interest and principal would have reduced the loan balance and built up equity of more than $6,000.
 
 
 

With mortgage insurance, buyers with a down payment of 3% or less can qualify for a traditional 30-year fixed-rate mortgage that will build equity at a faster rate than nontraditional loans.  Mortgage insurance lets borrowers with a less than 20% down payment purchase a home by providing lender coverage against borrower default.

“Mortgage insurance means you can get the loan for the house you want, despite a low down payment.  It’s a great tool to help you get into a home and start building personal wealth today,” says Steve Smith, President and CEO of PMI Mortgage Insurance Co.

Unlike nontraditional mortgages, payments on a 30-year fixed-rate mortgage with mortgage insurance will be the same each month, so borrowers can budget and plan for the future.  Mortgage insurance will be canceled automatically when your loan balance reaches 78% of the home’s original value, or you can request cancellation when you reach 20% equity or ownership.

North American Précis Syndicate, The Tennessean

PMI stands for Private Mortgage Insurance or Insurer. These are privately owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers.

These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility. PMI's usually have stricter qualifying ratios and larger down payment requirements than the FHA, but their premiums are often lower and they insure loans that exceed the FHA limit.