Author: Ryann Cairns
One of the questions that comes up most often among first time home buyers is that of private mortgage insurance. Mortgage insurance can be a difficult and confusing topic, but understanding what private mortgage insurance is and how it works can make shopping for a home mortgage loan that much easier.
Just what is mortgage insurance? Mortgage insurance is insurance that homebuyers are generally required to purchase if their down payment amount is too low. It usually is required for owner occupied family dwellings if the down payment is 20 percent or less of the purchase price of the home and land. Private mortgage insurance helps to protect the lender if the borrower cannot repay the loan.
Is mortgage insurance different from other types of home insurance? There are several types of insurance that a homeowner must consider. Hazard insurance is designed to protect the homeowner from loss due to specified hazards such as fire or flooding. Homeowners insurance protects the homeowner if the house and/or its contents suffer an unforeseen occurrence such as weather damage or theft. Mortgage life insurance is an insurance policy that provides financial protection for the homeowner and their family in the case of the homeowner’s demise. Mortgage insurance provides protection for the lender in case the borrower defaults on the home loan.
Why do I need mortgage insurance? Private mortgage insurance is an insurance policy designed to protect the lender in case you do not pay back your mortgage loan. If you are unable to make a down payment of at least 20%, you will typically be required to take out private mortgage insurance.
How are mortgage insurance premiums paid? Mortgage insurance premiums are collected in a variety of ways:
- As a monthly payment charged to the borrower
- As a lump sum payable by the borrower at closing
- Wrapped into the amount of the mortgage loan, or
- Wrapped into the interest rate of the home loan
What types of loans are covered by mortgage insurance? Any conventional loan where the borrower makes less than a 20% down payment need to be protected by mortgage insurance. It does not matter whether the loan is a 15-year mortgage or a 30-year mortgage. It also does not matter whether the mortgage loan is an adjustable rate mortgage or a fixed-rate loan. Mortgage insurance also applies to balloon mortgages, purchases, refinance deals and virtually any low down payment mortgage loan. Other programs, such as FHA insured mortgages, contain hybrid forms of private mortgage insurance that are charged to the borrower.