The Ins and Outs of Mortgage Insurance: A Few Good Questions

Elisabeth Myrick
Obtaining a mortgage can sometimes be a daunting task and buying a home, for many, is something they believe is out of reach. However, there are many options for consumers who do not have the “typical” 20 percent down payment. Mortgage insurance is one of those options.

What is mortgage insurance? Mortgage insurance, sometimes called lender’s insurance, is required of some homebuyers and is insurance for the mortgage lender themselves in case the homebuyer is not able to repay the loan.

Who is required to take out mortgage insurance? This insurance is designed to protect the lender if a borrower defaults on a loan, usually required for homebuyers who apply for loans that are more than 80 percent of the new home’s value, or a down payment of less than 20 percent of the sales price or appraised value of the home.

How does having mortgage insurance help me get into a house? Private mortgage insurance enhances the way a borrower looks on paper on the way to having a loan application approved. It will enhance your ability to attain a home and help you find the home you want , regardless of equity or down payment amounts.

Do I have to have mortgage insurance for the entire length of the loan? No. Once the principal amount owed is reduced to 80 percent or the new home’s value, mortgage insurance is no longer required.

This can be accomplished in two ways, (1) by paying down the principal or (2) if the value of the home appreciates, or both. This is commonly referred to as building equity in your home. Under federal law, specifically the Homeowners Protection Act of 1998, your lender must annually remind you of your right to request to cancel mortgage insurance. Lenders are also required to tell the buyer how many years and months it will take for them to reach that 80 percent balance in order to cancel their private mortgage insurance when it is no longer needed. Mortgage insurance is usually cancelled when the balance reaches 78 percent, although mortgage lenders are allowed to continue requiring lender’s insurance until the balance reaches 50 percent equity for high-risk borrowers.

These loans can include loans which required less documentation in order to be approved or some FHA loans.

What does this insurance cover for the lender? If the mortgagor is not able to repay the loan and ends up defaulting, the lender is not able to recover its costs associated with foreclosure and selling the mortgaged property. This insurance covers those expenses and annually costs between 0.19 percent and 0.9 percent of the total home loan value, depending on the loan terms, type and proportion of the home value that is financed.

What kind of down payment is usually associated with this insurance? With this type of insurance, it is possible for homebuyers to purchase a home with as little as a three to five percent down payment.

Is mortgage insurance a separate monthly payment? Private mortgage insurance may be required to be paid up front, or can be rolled into the loan price or monthly payment. It is a fixed-fee, predictable monthly payment and is tax-deductible.

How is mortgage insurance different that homeowners insurance? Mortgage insurance is very different from home insurance in that it insures the lender, not the homeowner, in the event of foreclosure.

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