Many people have questions about mortgage insurance, the different types of mortgage insurance, and how it works. In this article, we will answer all those questions.
What is Mortgage Insurance?
Mortgage insurance protects the lender or titleholder if the borrower dies, defaults payment, or becomes unable to meet the mortgage contract's agreements. Mortgage insurance can be on a conventional loan (Freddie Mac or Fannie Mae), FHA Loan, or VA Loan. So how does mortgage insurance work for the various loan types?
- VA Loan – it has a one-time upfront fee known as a funding fee. You can roll it into the price of the home. You do not pay mortgage insurance premiums every month.
- FHA Loan – the mortgage insurance (MI) stays with you for the entire time the loan remains in existence. Generally, one pays a qualified mortgage insurance premium. With FHA loans, everyone has to pay the mortgage insurance regardless of their down payment.
- Conventional Loan – it is popularly known as Private Mortgage Insurance (PMI). Ideally, if you put down 20% of the loan, you will not have PMI. Any value that is less than 20% will have PMI. Typically, the lesser the money you put down, the higher the PMI will be. Always remember that mortgage insurance protects the lender and not the borrower. The lender arranges the PMI and a private insurance company provides it. If someone is refinancing with a down payment of less than 20%, they will also pay PMI.
Generally, you do not have to pay 20% at once. You can pay in installments. Once you attain a 20% equity in the home you are buying, you can initiate talks with the mortgage insurance company to do away with the mortgage insurance premiums.
Some mortgage insurance companies will do the calculations in-house and scrap off the mortgage insurance, but others will want to do an appraisal. They will require you to pay for the appraisal, but it is quite affordable – around $300 or $350.
Mortgage Title Insurance
Mortgage title insurance protects in the event a sale gets invalidated later on due to a problem with the title. Generally, a beneficiary is protected in case the person selling the property is not the actual owner of the home.
Mortgage Life Insurance
Before getting the loan, every borrower needs to understand the risks associated with having a mortgage. As such, borrowers have to fill through the mortgage protection life insurance. A borrower can decline the mortgage protection life insurance, but they will have to sign several waivers and forms to verify their decision.
Generally, mortgage life insurance protects the policy holder’s loved ones in case the policy holder dies before paying off the mortgage. Your loved ones will be paid a lumpsum to enable them clear the mortgage debt to ease their financial burden.
Mortgage insurance works to protect lenders in case the borrower is unable to meet the contractual obligations of the mortgage. You need to talk to your loan officer to know the type of mortgage insurance that applies to you.
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