What Is Mortgage Insurance?
Mortgage insurance is an insurance policy that covers a lender if a home buyer does not make the required payments on his or her mortgage. Even though the policy covers the lender and not the person buying property, the buyer must pay the cost of the insurance policy. The upside of the insurance is that it enables potential home buyers to gain approval for loans they might otherwise be denied.
- Typically, a twenty-percent down payment on the purchase price is required to secure a mortgage.
- Many lenders offer loans to buyers who are not able to furnish the entire twenty percent on the condition that the buyer purchases mortgage insurance.
- This enables many home buyers to gain approval for a mortgage with a down payment of only ten percent.
- Often, the cost of property is less overall if the buyer makes a larger down payment at closing rather than purchasing the insurance, but if the buyer cannot afford to put more money down or does not want to wait to save twenty percent, the insurance policy provides a means to purchase property.
There are several different types of insurance policies. The primary differences among them are how and when the payments are made. Some types of policies include the cost of the insurance in the mortgage. This means that a portion of your monthly mortgage payment includes the cost of insurance, and that you are paying interest on the insurance. Other types do not accrue interest. Instead, you make yearly or monthly insurance payments.
Even if you need to purchase insurance in order to purchase a home, you likely will not need to the mortgage insurance throughout the duration of the mortgage.
- Once you have paid at least twenty percent of the property's value to the lending institution, you will usually be able to cancel your insurance policy. When the property's value increases, you gain equity in the property, which can also allow you to discontinue the insurance.
- Because this is an additional cost to owning a home and, in the
case of default, covers the lender not the buyer, it is
advantageous to discontinue as soon as you are able.
Many factors affect how much you pay for your insurance policy. Yearly rates are a very small percentage of the total value of your loan. This means that if you have a level annual or monthly premium plan, your insurance rates can decrease each year as you continue to pay down your mortgage.
Not only does the value of your mortgage affect the insurance rate, but the percentage of your property’s value covered by your mortgage also influences it. Generally, the higher the percentage borrowed, the higher the rate. The length of your mortgage also affects the rate; a fifteen-year mortgage will have a lower rate than mortgages that last thirty or forty years.
Mortgage insurance quotes will differ based on the type of mortgage you have. Fixed-rate mortgages, where interest rates stay the same for the duration of the loan, usually have lower rates than adjustable-rate mortgages with interest rates that can change on a yearly basis. Buying insurance for a second home is also usually more expensive than for a primary residence. Refinancing your mortgage can also be more expensive than purchasing insurance at the time you closed on your property.
Your credit rating also affects how much you will pay. When calculating how much you will pay, companies take into account your current level of debt weighed against your income. If you have bad credit or have very little credit history, you may have to pay more than someone who has established a good credit score. Large debt owed on credit cards or school loans can also increase your insurance rates.
As you debate whether mortgage insurance is worth the cost,
consider eliminating the need for it by making a higher down
payment. However, purchasing insurance can allow you to buy a home
before saving a twenty-percent down payment.
Mortgage Insurance Directory