If you are a homeowner or looking to become one, chances are you have already come across the concept of mortgage insurance. And if you haven’t it is worth understanding what this entails as you may be mandated to have it in some cases. Read on to know more.
Mortgage insurance is a policy that aims to protect lenders or titleholders if a borrower defaults on payments, passes away, or is unfit to fulfill the contractual obligations of the mortgage. We will go into detail on the different types of mortgage insurance, in a nutshell, private mortgage insurance or PMI which also places an obligation to make the lender or property holder whole in the event of losses. Mortgage insurance is not to be confused with mortgage life insurance which sounds similar but is quite different in reality. Mortgage life insurance is designed to protect heirs in the scenario where the borrower passes away while owing mortgage payments.
The ABCs of mortgage insurance
Mortgage insurance is flexible and can depend on your own needs. You can take up a pay-as-you-go model which allows you to make payments in installments, or you could opt for a lump sum payment which can be made at the time of mortgage origination. Let’s explore the 3 types of mortgage insurance:
- Private Mortgage Insurance or PMI: It’s important to understand that PMI is a type of mortgage insurance that protects the lender, not the borrower. PMI is usually needed if a borrower gets a conventional loan with a downpayment of less than 20%. It may also be needed in the scenario where the loan and equity are less than 20% of the home’s value.
- Qualified Mortgage Insurance or MIP: This is applicable and mandated if you get a US Federal Housing Administration-backed mortgage, where you will need to pay a qualified mortgage insurance premium. MIP has different regulations and anyone who has an FHA mortgage has to have this, regardless of the size of the down payment.
- Mortgage Title Insurance: This policy protects against loss if a sale is later invalidated due to issues with the title. This essentially protects beneficiaries against losses and is determined at the time of the sale. Before a mortgage closing, a representative will perform a title search to ensure that the real estate being sold belongs to the seller.
For anyone applying for a conventional loan, people may need to mortgage insurance until they have a minimum of 20% equity in the home. The exception is for those availing of FHA loans wherein the MIP will be in place right up till the mortgage is paid off in its entirety.
Who benefits from mortgage insurance?
Largely, mortgage insurance exists to protect the risks being undertaken by the lender. It can also protect a mortgage company from losses if the person borrowing is unable to make the payments for whatever reason. It protects lenders from losing money, but it is important to note that it will not protect borrowers from losing their homes in case they default.
Can I skip mortgage insurance?
For lenders, it is a huge risk to not have mortgage insurance that‘s why its mandated often when loans are paid out. As a rule of thumb, borrowers are expected to put down mortgage insurance unless they are sharing 20% of the down payment. Lenders and borrowers can also negotiate higher interest rates which can compensate the lender’s risk. Again, the only exception is FHA loans which call for premiums regardless of the equity you may hold in a home.
Pros & cons of mortgage insurance
It is not all grim for borrowers, and one must not be discouraged by mortgage insurance because it can benefit borrowers in some cases. While having an additional payment towards your mortgage is certainly a con, for financially responsible borrowers, getting a mortgage with a much smaller down payment is certainly a possibility. This has not always been the case. Potential homeowners may be discouraged from making huge down payments, and mortgage insurance is a great way to circumvent this. You can get your dream house with a white picket fence without having to shell out a huge downpayment – on the condition that you have mortgage insurance. For lenders, it negates the risk. In general, for lenders mortgage insurance is the best way to safeguard oneself from financial loss in the event that the borrower is unable to fulfill their mortgage for whatever reason.
In conclusion, mortgage insurance exists to primarily protect lenders, but it can also have added benefits for borrowers as well in the long run. It makes housing more accessible without the stress of huge down payments. For financially responsible borrowers, it can be a great way to get your dream house without worry. If you are looking to get mortgage insurance, reach out for a custom policy, tailored to cater to your needs.