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Learn More / Mortgage Insurance (in Q & A)
What is mortgage insurance?
Who is mortgage insurance for?
What does mortgage insurance do for borrowers?
Who pays for mortgage insurance?
Is there anything else important to know?
Q. What is mortgage insurance?
A. It's a financial guaranty that insures lenders against loss in the event
a borrower defaults on a mortgage. If the borrower defaults and the lender
takes title to the property, the mortgage insurer reduces or eliminates the
loss to the lender. In effect, the mortgage insurer shares the risk of lending
the money to the borrower.
Mortgage insurance should not be confused with mortgage life insurance,
which provides coverage in the event of a borrower's death, or homeowner's
insurance, which protects the homeowner from loss due damage from fire,
flood or other disaster.
Q. Who is mortgage insurance for?
A. All home buyers can benefit. It allows them to become homeowners
sooner, and it dramatically increases their buying power excellent
benefits from a buyer's perspective.
First-time buyers can use a low down payment to help them afford their
first home, or to purchase a more expensive home sooner.
Repeat home buyers can put less money down and gain significant tax
advantages because they will have more deductible interest to claim
on their tax return. They can also use the cash they would have used for
a large down payment for investments, moving costs or other expenses.
Q. What does mortgage insurance do for borrowers?
A. Without the guaranty of mortgage insurance, lenders normally
require a borrower to make a down payment of at least 20% of a home's
purchase price, which can mean years of savings for some borrowers.
This large down payment assures the lender that the borrower is
committed to the investment and will try to meet the obligation of monthly
mortgage payments to protect his investment.
With the guaranty of mortgage insurance, lenders are willing to accept
as little as 5% or 10% down from borrowers. Mortgage insurance fills the
gap between the standard requirement of 20% down and an amount
the borrower can more easily afford to put down on a purchase.
A low down payment also allows borrowers to purchase more home than
they might otherwise be able to afford. Without mortgage insurance,
a borrower who has saved $10,000 for the required minimum 20%
down payment would only be able to purchase a $50,000 home.
With mortgage insurance (and income and credit permitting), the borrower
\could make a down payment of only 10% and purchase a $100,000
home with the $10,000! Or put $7,500 down on a $75,000 home and
use the remaining $2,500 for another purpose such as decorating, investing,
or buying a major appliance. Mortgage insurance broadens a
borrower's options.
Q. Who pays for mortgage insurance?
A. Generally, borrowers do. An initial premium is collected at
closing and, depending on the premium plan chosen, a monthly
amount may be included in the house payment made to the lender,
who remits payment to the mortgage insurer.
Some mortgage insurance companies offer flexible premium plans
for borrowers:
Annual. This the traditional (standard) mortgage insurance plan.
The borrower pays the first-year premium at closing; an annual renewal
premium is collected monthly as part of the total monthly house payment.
Monthly Premiums. The cost is slightly more than the traditional (annual)
mortgage insurance plan above, but monthly premiums dramatically
reduce mortgage insurance closing costs. Borrowers pay for mortgage
insurance monthly as part of their total monthly house payment but
only need to pay, depending on the lender's requirement, two to three
month's mortgage insurance premium at closing, rather than one year's.
Life-of-Loan Single. The borrower pays a one-tune single premium
(instead of an initial premium and renewal premiums). Since single
premiums are typically financed as part of the mortgage loan amount,
no out-of-pocket cash is used for mortgage insurance at closing.
Both the Annual and Single plans offer the choice of refundable or
non-refundable premiums. A refundable premium allows the borrower
the opportunity to receive money back on any unused portion, in the
event that mortgage insurance coverage is discontinued before the loan
is paid in full.
The cost for a non-refundable premium is slightly less than that of a
refundable premium, thereby giving a borrower a small savings.
If coverage is discontinued on a loan with a non-refundable premium
the borrower has no opportunity for a refund.
Q. Is there anything else important to know?
A. No. Just remember, with mortgage insurance, borrowers can
increase buying power, put less money down and purchase a home
sooner.
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