FAQs about Mortgage Insurance

  • FAQs about Mortgage InsuranceDo I need this type of insurance? Whether you need insurance usually depends on the size of your down payment. Lenders generally require it if a down payment is less than twenty percent of the property’s value. However, the insurance can be terminated once the sum of your down payment and monthly payments equals at least twenty percent of the property’s value. You can avoid it by making a larger down payment or by taking out an additional loan that, in conjunction with your down payment, is equal to at least twenty percent of your property’s value.
  • Is this type of insurance expensive? The cost of the insurance policy depends on the value of your loan. Generally, insurance costs less than one percent of your loan value per year, so the larger the loan, the more the insurance will cost. The cost of the insurance also varies depending on the type of policy; single premium and split premium mortgage insurance policies include interest, while monthly premium and annual premium policies cost more up front but do not accrue interest. Usually, monthly and annual policies cost less overall than single or split premium policies.
  • How does mortgage insurance work? It works by covering the lender if a borrower does make agreed-upon mortgage payments. However, it is the borrower, not the lender, who pays for the insurance. This seems like a disincentive to purchase coverage, but borrowers who cannot afford a twenty-percent down payment or who have poor credit may not be approved for a loan without insurance. Borrowers can roll the cost of the insurance into their loans or pay for it on a monthly or yearly basis.
  • How do I determine how much insurance coverage I need? The amount of insurance required depends on the value of the loan and the length of time it will take to have at least twenty percent equity in your property. The sooner you are able to pay off at least twenty percent of your home’s value, the less insurance coverage you will need.
  • What is the minimum for mortgage insurance? The minimum amount required will depend on the size of your down payment, the value of your loan, and how quickly your mortgage payments amount to at least twenty percent equity in your property. Generally, to keep the amount you spend down, make the largest down payment you can and overpay your mortgage for the first few months or years in order to reach twenty percent in equity more quickly. Once you reach twenty percent in equity, you can terminate your policy and spend less money.
  • When is this type of insurance required? Most lenders require a buyer to purchase mortgage insurance if the down payment is less than twenty percent of the property’s value. Smaller down payments are equated with a greater risk for defaulting, which is why lenders are more likely to issue a loan if the borrower has insurance. Once your down payment and mortgage payments have reached twenty percent in equity in your property, insurance will no longer be required and you can terminate your policy. You can avoid the need for this type of insurance by waiting to purchase property until you can afford a twenty-percent down payment.
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