Mortgage Insurance: Explanation Of Mortgage Insurance

Mortgage insurance is for your money lender but you may not get a loan to buy a house without it. Mortgage insurance covers your lender if you default on your loan.

Here are some facts regarding the management of your mortgage and insurance coverage:

  • If you make a down payment on your house that equals more than 20 percent of the loan, you can avoid paying for mortgage insurance.
  • As of 2007, homeowners who pay for mortgage insurance can use it as a tax write-off under the right circumstances.
  • You may be required to pay an initial premium up front in the amount of one year coverage, or the premium may be included in your mortgage payment.
  • You may be required to have mortgage insurance coverage for a period of time, such as two or three years.
  • If you are not required to purchase mortgage insurance, your lender may have lender-paid private mortgage insurance (LPMI) adding the premium to your interest payments.

There are ways to cancel your mortgage insurance.

Mortgage Insurance: Explanation Of Mortgage Insurance
  • Once you have 20 percent equity in your home.
  • If the market value of your house increases, you can ask for a reassessment to confirm whether or not you have reached 20 percent equity.
  • Do some remodeling to increase the value of your home.

Mortgage insurance is also known as lender’s mortgage insurance (LMI) or private mortgage insurance (PMI) and typically costs around $55 per month for each $100,000 of your mortgage. Your mortgage insurance premium is based on:

  • The amount of the loan, the loan terms and the type of loan.
  • The value of the home and the amount of mortgage insurance coverage.
  • Whether payments are made monthly, annually, or in one payment.
  • Your credit rating.
  • Whether the house is your primary, secondary or investment property.

The Homeowner’s Protection Act (HPA) that was passed in 1998, protects homeowners. For example, your lender must automatically cancel your mortgage insurance when:

  • You obtain between 77 and 78 percent equity.
  • When you reach the midpoint of your mortgage; for example, on a 20 year mortgage, you do not need to pay for mortgage insurance after 10 years.

Mortgage insurance will eliminate or reduce the loss the bank incurs if you can no longer make your mortgage payments. However, it also makes it possible for first-time home buyers to be approved for a mortgage.

Mortgage Insurance: What Does Mortgage Insurance Cover?

Even though you pay the premiums for mortgage insurance, it is your money lender that is the indemnity beneficiary if you default on your mortgage.

The biggest benefit of mortgage insurance is that as a first-time home buyer, you will not need to come up with a 20 percent down payment. More good news is that when you reach 20 percent equity, you can cancel your mortgage insurance. Most money lenders do, however, have lender-paid private mortgage insurance (LPMI) that you do not see and their premiums are added to your mortgage interest payments.

Mortgage insurance coverage is directed by financial investors like Fannie Mae or Freddie Mac. They dictate the amount for which the lender would be covered if you were to default on your loan.

Your home is probably going to be your biggest investment, meaning a very high percentage of your income will go towards your mortgage payments. When a lender takes a risk and lends you an amount of money equaling a high percentage of your current assets, he is taking a big risk. There is a wide range of reasons why you may not be able to continue paying your mortgage and money lenders cover themselves for all contingencies:

  • Sickness, injury or any other type of long-term disability, even death.
  • Extended unemployment due to layoffs and lack of work.

Your standard mortgage insurance coverage can cover your payments between 12 months and five years. The main stipulation that activates your mortgage insurance is you being sick, injured, disabled or unemployed for more than 30 days. Voluntary unemployment or elective surgery will not be covered by your mortgage insurance. A standard mortgage insurance policy usually only covers a temporary lapse in mortgage payments, not a permanent situation. In order to be covered for a permanent state of mortgage non-payment, you usually need additional coverage at a higher premium or an entirely separate insurance policy.

Mortgage Insurance: What Does Mortgage Insurance Cover?

The U.S. government has been encouraging money lenders to initiate mortgage holidays. This may actually replace the need for mortgage insurance. A mortgage payment holiday is available to qualifying mortgagees when they find themselves having temporary money problems. Some banks will offer up to a one-year holiday. However, these payments do not disappear; your payments and their accumulated interest are added to your principle.

Your lender will require mortgage insurance to cover his potential loss for your payment default.

Mortgage Insurance: Who Needs Mortgage Insurance?

Mortgage insurance is not a legal requirement. However if you want to purchase a house with less than a 20 percent down payment, your lender will insist on covering their risk on your loan.

There are a number of high-risk groups that lenders will insist are covered with mortgage insurance, including:

  • First-time home buyers.
  • Someone with a down payment of less than 20 percent.
  • Someone with an inconsistent work history.
  • A retiree on a pension.

There are other circumstances that may require the addition of mortgage insurance, such as:

  • If you are interested in buying home that requires a larger down payment than what you have saved.
  • Requesting refinancing for more than 80 percent of the value of your house.
  • Using your equity to consolidate your debts or renovate your home.

Mortgage insurance covers only residential properties. If you own a commercial property, such as a condominium complex or a mall, you will need commercial mortgage insurance.

  • Commercial mortgage insurance covers your lender differently because they are taking a bigger risk.
  • Premiums are not paid in the same form as residential premiums. Lenders may ask for a percentage of the project in cash or securities.
  • A commercial loan is based on the potential income of the property.

War veterans can secure a mortgage with the aid of the Veteran’s Administration (VA). The VA will guarantee a loan on behalf of the veteran and will act as mortgage insurance. The lender may request a one-time funding fee in an amount between 0.5 percent and three percent. There is no monthly insurance premium, nor is there a refund when equity reaches 20 percent.

The Federal Housing Administration (FHA) will help people who are a high credit risk to secure a loan to buy a house.

  • If you are a first-time buyer with low income or bad credit, the FHA can help provide financing.
  • If you want to buy a fixer-upper you can have your mortgage and repair costs consolidated into one loan.
  • If you own a home that needs remodeling or repairing you can refinance through FHA.
  • If you are a senior over 62 years of age, and you have paid off most or your entire mortgage, you can cash in some or all of your equity to pay for other expenses or needs.

Mortgage insurance makes it possible for people to have their own home, even if they have very little savings or are first-time buyers.

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