If you find yourself asking what is mortgage insurance used for and how you benefit from it, you are in the right place. In a nutshell, mortgage insurance is a policy that protects the lender or title holder in the situation that a homebuyer doesn’t make their monthly mortgage payments and the borrower defaults on the loan. Of course, mortgage insurance should not be mistaken for homeowners insurance, which protects the property itself against damages. Many first-time homebuyers struggle to save enough funds to cover closing costs plus the 20% down payment for the loan amount, and that is where mortgage insurance can help.
What are the three most popular types of mortgage insurance?
Private mortgage insurance or PMI
Conventional mortgages require some form of a down payment in most cases. Private mortgage insurance (PMI) is for borrowers making a down payment of less than 20% on a home. In the event that a homebuyer cannot afford a down payment amount of 20%, many homeowners utilize PMI to offset those funds and secure a loan (typically conventional loans). In most cases, PMI is canceled once the principal mortgage reaches 20%.
On the other hand, many homeowners choose to forego investing a full 20% upfront and make a low down payment so they can use the extra cash for emergencies and remodeling. Others may elect to put down a smaller down payment in favor of having more cash on hand for personal finances, repairs, remodeling, furnishings, and emergencies.
Mortgage insurance premiums (MIP)
Mortgage insurance premiums, or (MIP) are mortgage insurance premiums paid by any homeowner that uses a loan backed by the Federal Housing Administration (FHA) and are typically set for the life of the loan. Since The FHA uses these insurance policies to protect themselves against high-risk borrowers that run a higher foreclosure probability, FHA mortgage insurance is required for all federally backed FHA loans. Keep in mind most FHA home loans require an upfront mortgage insurance premium or MIP and an annual premium regardless of the down payment amount. Typically these upfront mortgage premiums are rolled into the monthly mortgage payments.
Mortgage title insurance
Mortgage title insurance protects lenders and buyers from financial loss on the condition that there are defects in a title to a property. Since all real estate transactions have to have a title that is free from liens, insurance companies use these policies to protect lenders from title issues. Some examples of these are back taxes, liens, and conflicting wills. A title insurance policy covers multiple risks, like flawed records, incorrect ownership, and falsified documents.
Why do borrowers have to pay for mortgage insurance if it only protects the mortgage lender?
Expressed simply, homeownership is a privilege, and mortgage insurance works by alleviating the need for borrowers to have 20% of the home purchase price as a down payment. In a sense, this policy allows borrowers with lower funds to be able to purchase homes that they otherwise wouldn’t be able to get into. The policy basically covers the additional upfront cost of a down payment.
Let’s talk about Mortgage Protection Life Insurance.
It is recommended to purchase a term life insurance policy for the full amount of your home’s value. On the condition that the homeowner passes away during the “term” when the policy’s in force, your loved ones receive the face value of the policy, they can use the proceeds to pay off the mortgage, and in many cases, these funds are tax-exempt.
What is mortgage insurance for when you are using VA Loans?
Since the Department of Veterans Affairs (VA loans) are federally backed types of loan, they also sit in the same category as an FHA loan, and they require PMI for the life of the loan. Keep in mind that service members that take advantage of these amazing financing opportunities will additionally be responsible for the VA funding fee.
What is a mortgage insurance piggy-back loan?
An example of a piggy-back loan is when a borrower takes out two loans for the same property. The first mortgage is for 80% of the property value, and the second mortgage is for 20%. Typically lenders want 10% down for this option. In this situation, borrowers need to make a cost comparison to see which option will save them the most money for the life of the loan.
When does mortgage insurance get paid off?
In a nutshell, you can remove mortgage insurance when the loan to value (LTV) meets 20% of the principal balance. Many homeowners use this time to refinance their loans. Oftentimes, borrowers have better credit scores by this point, and they are ready to upgrade loan terms and purge those mortgage insurance costs. For borrowers with FHA upfront mortgage insurance premiums, the Homeowners Protection Act (PMI Cancellation Act) can help remove these policies in some cases.
USDA Loans & Mortgage Insurance
Pertaining to loans offered by the U.S. Department of Agriculture, or USDA loans. There are some conditions to consider. Farmers and ranchers interested in rural living will be required to carry mortgage insurance. The USDA publishes standard guarantee fees and updates them regularly. Keep in mind as of February 2023, USDA loans have an upfront fee of 1% and an annual fee of 0.35%.
The importance of professional advice
Undoubtedly, the home-buying process can be confusing, and understanding how to protect yourself from making mistakes is a priority. For this reason, aligning with a lender you can depend on is paramount. It makes sense to find a real estate agent that you trust, and securing financing is equally important.
What is mortgage insur.ance for? Now you know! Let’s connect and secure funding for your loan.
Your home plays a major role in financial security. So, regarding your mortgage loan, you want to be sure you’re making responsible decisions. Undoubtedly, the loan process invokes insecurity in many people. In particular, navigating through a sea of paperwork and financial jargon can be unsettling without honest guidance. In fact, a lack of clarity can lead you down the wrong path and compromise your financial future.
You deserve to work with a lender who brings clarity and has your best interest at heart. Whether you are looking to purchase a home, help with refinancing, lower interest rates, or specifically ensure that you have made the best decision for the life of your loan, Mortgage Insider can help you after helping thousands of families reach their goals to create stronger financial futures.
The steps are simple:
1. Schedule a Call: An experienced loan officer can discuss your needs and guide you through the possibilities.
2. Get Approved: We’ll help you through the application process and facilitate the steps for approval.
3. Exhale: Put your feet up and feel secure knowing you made the best decisions about your home loan.
With proper guidance, you can get your first home, accommodate your growing family, and start that renovation project—whatever goal is on the horizon. An alliance with Mortgage Insiders will give you the confidence to know that your mortgage loan is setting you up for financial success. Mortgage Insiders offers today’s latest financial news and mortgage trends. Check out their channel for current events.
