While the prospect of getting mortgage insurance seems beneficial, what exactly is mortgage insurance, and who is it for?
There have been many misunderstandings concerning mortgage insurance, especially among borrowers. While the prospect of getting mortgage insurance seems beneficial, what exactly is mortgage insurance, and who is it for?
Today, we’ll be looking at what mortgage insurance is, how it works, and who it’s for. So let’s get right into it.
Mortgage Insurance: The Definition
Mortgage insurance is a type of insurance that protects the lender from borrowers who pose a greater risk of defaulting on their mortgages. Typically, mortgage borrowers need to pay 20% of the mortgage price as a down payment. However, this may be too much for some borrowers.
In cases where borrowers cannot meet the 20% threshold, they may be required to take mortgage insurance. Mortgage insurance is meant to protect the lender if the borrowers fail to fulfill their payment agreements.
This insurance makes it possible for low-income borrowers to qualify for a mortgage, even if they can’t afford the down payment. All FHA mortgages require borrowers to pay mortgage insurance, even when they can afford a 20% down payment.
How Does Mortgage Insurance Work?
The confusion on how mortgage insurance works is because the borrower pays the insurance, yet it protects the lender. The borrower pays a monthly insurance fee to the insurer to put it into perspective. Then, if you stop making payments, the insurer pays the lender a portion of the principal.
However, this doesn’t mean that the borrower is now free to default on the mortgage entirely. If you fall behind on several payments, the lender has the right to foreclose your home.
How Do Mortgage Insurance Payments Work?
Mortgage insurance varies with the type of mortgage borrowers take out. For instance, mortgage insurance for conventional loans is different from that of government-backed loans.
Lenders can allow as little as 3% down payments as long as they pay for mortgage insurance. Borrowers will have to pay Private Mortgage Insurance or PMI. You can use a PMI calculator to determine how much you’ll have to pay, depending on your circumstances.
Lenders allow a down payment of as little as 3.5% of the mortgage. However, borrowers will have to pay for a mortgage insurance premium or MIP throughout the mortgage period. For example, if you pay a down payment of over 10% of the mortgage, you’ll pay the insurance for about 11 years.
USDA loans don’t require any down payments and are typically for rural homes. For these loans, you’ll pay an upfront fee and subsequent fees annually for the life of the loan. The federal government decides how much fees you’ll pay yearly on a fixed basis.
Mortgage Insurance Made Easy
Clearly, mortgage insurance isn’t for everyone, but it does come in handy for low-income earners. However, if you can’t afford to pay the 20% down payment of the mortgage amount, you can always take the mortgage insurance route.
Do you need a mortgage? Contact Better Rate Mortgage today to get started on your mortgage application.