What Is Home Mortgage Insurance For?

Overview

Mortgage Insurance
What Really Is Mortgage Insurance?

Mortgage insurance is a type of insurance policy that is tasked with compensating the lenders or investors in the event of a client defaulting to pay the mortgage. It is very essential for home loan lenders to have this insurance because it reimburses their loan amount ensuring they don’t go at a loss when their clients don’t pay up for the home loan. It gives the lenders a financial guaranty, especially in cases where the homeowner did not pay the minimum down payment of 20% of the home’s value. The lender arranges the mortgage insurance and the premiums are paid by the homeowner who took the loan.

 

Why lenders require mortgage insurance

As observed already, mortgage insurance is very important for lenders and investors, whether they are companies, banks or financial institutions. First when a client; the borrower has a mortgage insurance, it makes them credible for the lender. The lender is pretty assured that in case the borrower fails to pay there will be no loss.

 

The lender always wants to sell a home to a borrower who is committed to paying up toil the end. The mortgage insurance policy reaffirms the lender that their client is committed to the transaction, and that’s why they are ready to pay for the mortgage insurance alongside the loan installments, to avoid any risk in a time of foreclosure.

 

Many times in the event of a mortgage loan default, the lenders tend to reclaim the house. However, the house value is always lower than the amount needed for the default. Mortgage insurance protects the lender from having to reclaim a house whose value has depreciated by paying for the entire amount owed by the borrower.

 

Mortgage Insurance cost

Mortgage insurance costs tend to vary depending on the amount borrowed or value of the house, the period taken to pay for the loan, the loan interest, and the financial institution that is facilitating the insurance.

 

For instance, if a person is looking to purchase a house worth $200 000 on a 30-year mortgage fixed loan and they can only afford a 10% principal down payment, the borrower will need to discuss mortgage insurance with the lender. According to Banfield of Quicken Loans, you will pay a monthly mortgage insurance of $66 if your credit score is 720. If the interest rate for the period of 30 years is at 4.5%, then the mortgage payment will be $912 monthly. To find the total monthly payment that the homeowner will pay the mortgage payment is added to the mortgage insurance monthly premiums. In this case, the borrower will pay a total of $978 per month including the mortgage insurance premiums.

 

On the other hand, according to FHA Mortgage Insurance, the monthly payments will include not only the premiums but also property taxes and homeowner’s insurance. If the property taxes are charged at 0.5% of the value and homeowners insurance at 0.3%, then the borrower will pay a monthly total of $1240 inclusive of the property tax and home insurance.

 

Conclusion

Mortgage insurance is very important for both the lender and the borrower in any house selling transaction. Lenders gain the security of their loans when they have mortgage insurance whereas borrowers feel safe that in the case of a default in paying the loan the lenders will not reclaim their house. In selling a house, therefore, it is very critical that you sell it to a house buying company and consider mortgage insurance.