Understanding the Mortgage Insurance Policy
A mortgage insurance policy protects the lender from losing money if the borrower defaults on the loan. The policy will include the amount you pay for the insurance itself as well as for a cancellation procedure.
There are several types of policies. You will likely have a choice between single or split premium type insurance, monthly or level annual types of insurance. The rates in these policies vary. A single or split premium mortgage insurance policy includes interest, because the cost of the insurance is rolled into the loan cost. The interest rate will be the same as you pay on your mortgage. If you have a fixed-rate mortgage, your interest rate will remain constant. If you have an adjustable-rate mortgage, the rate of interest you pay can change each year you hold your mortgage insurance policy.
Monthly or level annual policies will have higher monthly or yearly payment rates than single or split premium policies. However, monthly and level annual policies do not accrue interest, so there will be no interest payment included in your policy. If you set up monthly payments for an annual policy, it will also include the monthly rate you owe for your insurance.
Insurance policies may also include a procedure to terminate your insurance. It is usually in your best interest to cancel your insurance once you have twenty percent equity in your property. A lender may be legally required to cancel the insurance when you have reached twenty-two percent in equity, but you can save money if you are sure to cancel once you reach twenty percent.
Mortgage insurance may also include additional benefits for the
lender. Sometimes, companies provide extra services to lenders that
can end up costing the borrower money. Before settling on a policy,
go over the details that specify services included in your
insurance. That way, you will not inadvertently assume extra
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