Mortgage Insurance is the boon for both Lenders and Home Buyers
“Mortgage insurance” the term simply implies an insurance policy or financial guarantee through which lenders and investors can reduce or eliminate the loss if the borrower is at default during repay. While you ask a loan officer about his or her experience during closings in last few years, the most number of discussions would be around first time home buyers. It is all about important guidelines on mortgage insurance that home buyers need to know.
Such as: what is this insurance policy? Why do you have to have this? How long do you have to pay for it?
What does mortgage insurance mean?
We can analyze the mortgage insurance concept through an example. Suppose, Mr. Bean a first time home buyer is planning to buy a house of $200000. He can afford only 10% of the total cost as down payment and rest $180000 need to be arranged by the lender as a mortgage plan. As the loan amount exceeds 80% of the property’s sale price, the lender require mortgage protection insurance for the mortgage loans. This is to safeguard the lender against Mr. Bean’s insolvency. If insurance coverage is 25% of the $180000 (that is $45000) the rest $135000 will be bore by the lender himself. Now for the insurance mortgage insurer will ask a premium which has to be paid by the lender or the Mr. Bean. If the loan-taker defaults and the property get sold at loss the insurer will compensate the first $45000 to the lender. The insurance coverage may range from 20% to 50% of the property sale price.
Why this security is so important?
The idea of mortgage insurance is to disperse the risk factor between the lender and the insurance company. If there wouldn’t be mortgage insurance available, the lenders could never take big risk of lending high value to the home buyers. In such conditions it would be difficult for the customers to purchase a home or allow their home equity to consolidate debt or do renovation for their home.
When you can stop paying the mortgage insurance?
It varies depending on how your mortgage rules were drafted. But as per the universal guidelines you need to continue the payment for at least the first year of your loan. If down the line you have paid the amount in full, you can send a formal written request to the lender to remove the insurance. If you take FHA guaranteed loan you need to pay the monthly mortgage insurance for at least the first five years of the loan. For some home buyers this type of insurance might appear as unnecessary burden of cost, but you have the options to write off the taxes.
