Mortgage insurance is a type of home insurance that protects against losses due to the default of a mortgage loan. It can protect the homeowner or the lender of the mortgage loan. It helps keep stability in the housing market as more Americans are finding themselves with the prospect of foreclosure in their future. The nuances of mortgage insurance are complicated and not known to very many common Americans. The type of mortgage insurance issued has everything to do with the type of mortgage loan that is obtained. There are two basic types of mortgage insurance. There is mortgage insurance that is purchased from the government and there is private mortgage insurance.
Types of Mortgage Insurance
The differences in the types of mortgage insurance depend on the type of loan you have for your home. You will not need mortgage insurance if you have paid for your home in full because you are not at risk of not paying your mortgage. It is all about keeping the lenders in business and keeping the market stable at the same time. Mortgage insurance does not benefit a homeowner as much as it helps their lenders. There are some private mortgage insurance policies that will help a borrower if they can’t pay their mortgage because of illness or injury. Some insurance companies will help with monthly payments for up to three years. This is generally different than the mortgage insurance taken out at the time of the purchase of the home.
Homebuyers who put down an initial payment of less than 20% on their homes will more than likely have to have a mortgage insurance policy. If they are a veteran or they have an FHA loan their can find their mortgage insurance through the government. It will most likely be factored into your monthly mortgage payments and you will never even notice that it is there. Mortgage insurance was designed to protect the lender. The borrower generally pays for the premium through their mortgage payments and if they do default on payments and eventually their home is foreclosed on, the lender will be protected by the aforementioned mortgage insurance.
The other type of mortgage insurance is typically referred to as a private mortgage insurance policy or PMI. There are two different kinds of insurance that is taken out through a private insurance company. There is a borrower-paid private mortgage and a lender-paid private mortgage. These are self-explanatory on the surface. Many new homeowners will wonder which type to choose and what different factors play into the decision. It is important for you to talk to your real estate agent and a local insurance agent to get the full story and an explanation for your unique home buying experience.
A borrower-paid private mortgage insurance or BPMI is also known as a traditional mortgage insurance policy. Any potential homebuyer who puts down less than 20% of the cost of their home should and most likely will be required to take out a borrower-paid private mortgage insurance policy. It helps a borrower, in truth, because it offers many households who would not otherwise be able to take the risk of purchasing a home, to go ahead with the process. It insures a household or individual who does not have a lot of capital laying around. The main point of a BPMI is that it helps the potential lenders of the borrower’s mortgage with a high mortgage to value loan. The less put down right away on the cost of the home, the more important the mortgage insurance policy is because the mortgage becomes much higher.
One helpful characteristic of a borrower-paid private mortgage insurance policy is that it may be cancelled early. If a homeowner can show that their loan is less than 80% of the home’s value than they can cancel the borrower-paid mortgage insurance. They will lose the extra protection, but they can put the cost of the insurance premiums to the mortgage payments and own the home outright that much faster. The Homeowners Protection Act of 1998 was enacted to protect the borrowers and allow them to have more control over their mortgage insurance policy.
The other type of mortgage insurance that is available is called lender paid private mortgage insurance. The lender pays it for and many times the borrower is unaware of its existence. The cost of the premium is built into the interest rate that is charged on the loan so the borrower technically is paying for the insurance, but there is never an official value placed on it. It was put into effect because it offsets the losses in the case that there is a foreclosure or a homeowner is not able to repay the loan given for their home. It benefits all Americans by stabilizing the housing markets and making it easier overall to get a home loan and purchase a house without a lot of available cash at hand.
Mortgage Insurance Rates
The typical rates for private mortgage insurance range quite a bit, but they can be as low as $55 a month or as high as $125 a month. The cost depends on your lender as well as the amount put down at the time of the home purchase. This can seem like an unnecessary cost as it is a high premium and technically it does not even benefit the borrower. But overall it benefits the homeowner as it allows them to purchase their home in the first place. Many lenders would not risk a loan to households that couldn’t afford at least 20% down. With the prospect of a solid mortgage insurance policy, more lenders can take the chance on a household looking to purchase a home and build their equity.
Benefits of Mortgage Insurance
In America the rise of foreclosures in recent years has created a ripple that echoed across the nation’s economy. In August 2013 the rate of foreclosures was 1 in about 1,000 homes. The state with the highest rate of foreclosures was Nevada with around 1 in 300 homes foreclosing. Without the advancement of mortgage insurance there might be less homeowner’s but the economy would certainly be in a worse place as the lenders would not be able to absorb the impact of so many foreclosures and the subsequent losses they would feel because the loans they issued would never be repaid.
There are benefits of mortgage insurance. Some policies pay your monthly mortgage payments if a financial setback occurs. Some companies even have a policy that helps pay off your mortgage if an illness or injury occurs that prevents you from paying. In the event of death most mortgage insurance policies will pay off the mortgage if it is not already covered through your existing life insurance. Overall mortgage insurance supports the borrower through tough times. Even though it may seem to only benefit the lender, it does provide support that otherwise would not be there.
There are many different options for payments of mortgage insurance. Rates can be paid as a lump sum, annually or monthly. They can be worked into the interest rate of the mortgage or they can be a separate amount. It can also be figured into the mortgage so that the borrower never notices the extra cost. The rates typically amount to about half a percent of the total loan. There are a lot of factors that play into figuring out the mortgage insurance rates. There is the percent of the loan insurance, the loan-to-value amount, and whether it is a fixed or variable mortgage, and even the borrowers credit score. There are sometimes ways for a first time homebuyer to get a break on a mortgage insurance payment because insurance companies want a loyal customer. In the end the coverage of mortgage insurance protects lenders against the default on the mortgage by the borrower. The borrower is technically paying, through mortgage insurance, for the privilege of having a mortgage.
It is sometimes unavoidable that a borrower defaults on their mortgage. The benefit of mortgage insurance is that the default is not as damaging to the lender. They lose a little in asset but they also are protected and therefore those savings can be transferred to their other customers. They have the ability to take larger risks with potential homebuyers. The need for mortgage insurance can disappear as well with the eventual lessening of a mortgage. Once a mortgage reaches a certain level in comparison to the value of the home, mortgage insurance is no longer necessary. The borrower has shown that they can handle the payments and they are not a risk to the lender.
Mortgage insurance is beneficial but it is not very noticeable. A borrower makes steady monthly payments that never increase or change. They are payments to show good faith and works to create a base for the potential defaulting of a loan. Most companies provide competitive monthly payments that allow for the borrowers to feel secure yet not feel burdened by the payments. There is also the added benefit of the paperwork for mortgage insurance being easier and more convenient than closing paper for an FHA loan. Usually borrowers can finance mortgage insurance through their lenders and it is worked into the mortgage agreement. In rare situations a borrower can look for private mortgage insurance through other insurance agencies.
Most lenders, when financing mortgage insurance, choose the mortgage insurance plan and company. The borrower is given little choice towards what premiums they pay and where their insurance policy is coming from. This is because the policy is intended to benefit the lender and not the borrower. The homebuyer is benefiting from the mortgage insurance policy because they are getting a mortgage when they can’t afford to put down more than 20% of the home value at purchase. The lending company is taking a risk on the homebuyer and so they have to trust in the decision for mortgage insurance.
Mortgage insurance premiums are tax deductible in some cases. It can help with the overall cost of the premiums as they are factored into the monthly mortgage payments. The different mortgage insurance options all benefit the borrowers as they support them through tough times if necessary. There are certain clauses that allow borrowers to miss out on mortgage payments. There will be eventual payments but for a time a homebuyer can hold off on their monthly payments. It is in the best interest for most lenders to allow this to happen to avoid a foreclosure. Everyone is working towards eventual cancellation of mortgage insurance. Cancellation of insurance can happen upon 80% of home’s original value.
There are safeguards for mortgage insurance policies and insurance agents. Because the housing market is so connected with the nation’s economy there are many regulations. A state insurance regulator must approve a mortgage insurance rate. There are ways to avoid mortgage insurance policies if necessary as well. As a veteran you can take out a VA loan, making a mortgage insurance policy unnecessary. You could also pay a higher interest rate on your mortgage to forgo the mortgage insurance. Many homebuyers take out a combination loan of 80/10/10 with 10% down, 80% first mortgage and 10% second mortgage. That strategy has gained popularity because most lenders will not require mortgage insurance on top of it. There are also certain special loans with certain companies for teachers and doctors. That do not demand private mortgage insurance. These are for special cases and can be hard to find but they are beneficial.
The original and easiest way to avoid mortgage insurance is to put down 20% of the home value or more as a down payment, although that is not always possible. Every year nearly one third of families applying for home loans have less than 20% equity. These are the clients for whom mortgage insurance is vital. It allows them to be able to afford a home. Mortgage insurance affects almost all American homebuyers at some point in their financial history. It is beneficial, but like any insurance policy not always necessary. It can mean the difference between being approved for a home loan and being denied the opportunity to prove you, as a homeowner, are responsible and will fulfill the mortgage loan.
Some other Enhanced Insurance articles related to Home Insurance:
Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.
While the majority of people want an agent involved in their purchase of insurance, many people want to see if they can save money by buying direct from the insurance company. Others want to try a direct quote to make sure the premium they’re now paying through their local agent is fair. If you want a quote for your coverage, click on the competitive quote button on the right side of this page.