What Is Mortgage Insurance & Why You Might Have To Get It

Do you know what is mortgage insurance and who is eligible for it?

You may or may not know about it, so let’s start from scratch.

What Is Mortgage Insurance?

When the borrower’s down payment is less than 20%, he will need to pay for the mortgage insurance. The main purpose of mortgage insurance is to protect the lender in case the borrower is unable to meet the obligations.

But keep in mind that the cost of the mortgage insurance is added to your monthly payment plan.

What Is Mortgage Life Insurance?

As discussed earlier, one of the main reasons for mortgage insurance is to secure the lender. In case, the borrower dies, the death benefit will be an amount that will pay off the mortgage in the event of the borrower’s death.

The policies of mortgage life insurance vary from company to company. However, it is typically required on FHA or USDA loans.

How Does Mortgage Insurance Work In Different Circumstances?

When it comes to the need for mortgage insurance, it is something lenders should focus on. The borrower has to pay the premium and it may seem an extra expense for the borrower.

Let’s have a look at some of the examples of mortgage insurance:

  • When you get the Federal Housing Administration Loan (FHA), you will pay premiums to the FHA. It includes both an upfront cost, paid as part of your closing costs, and a monthly cost. They both will be included in your monthly payment.
  • If you are a borrower with good credit, you can request your lender to arrange for a conventional loan in which there is an involvement of the private company. The good news is that the rates are cheaper than FHA rates. The rates of Private Mortgage Insurance (PMI) vary by the variation in the amount of down payment. The borrower has the right to cancel PMI anytime.
  • Another cheaper plan than the FHA is the US Department Of Agriculture (USDA) loan. Here you may want to know the payment plans, so keep in mind that you will not only have to pay monthly but also at the closing for this kind of mortgage insurance.
  • If you are a veteran or an active disabled member, then you can opt for a Veterans’ Affairs (VA)-backed loan, where you will have to pay the fee upfront. However, it starts with no down payment and you can always turn it into a loan and can pay as monthly payments.

Is Mortgage Insurance Necessary?

Well, this question can be best answered by the lender. After thoroughly examining the financial situation of the borrower, the lender can choose the mortgage insurance option.

When seen from the perspective of the borrowers, they always want to avoid mortgage insurance. So the best solution for you to entirely avoid it is to pay at least a 20% down payment.

The Bottom Line?

Now you have read about mortgage insurance, and have a clearer concept now.

Still, have questions?

Share your ideas in the comment section below.