Types of Mortgage Insurance

Types of Mortgage Insurance Related Information:

When you take out a mortgage to purchase a new home, having mortgage insurance will allow you the privilege of making a lower down payment, giving you more money to purchase the furniture that you need. There are several types of mortgage insurance policies and you should not confuse them with mortgage life insurance policies. A mortgage insurance protects the lender against losing the money you borrow in the event that you default on the loan. It will not make the payments on the home or pay off the mortgage if you become disabled or if you die. It is purely protection for the lender.

It is a good idea for home buyers to have mortgage insurance because of the added benefit of being seen as a low risk to lenders, thus having more money to play with. Instead of having to save up 10% or 20% of the total amount of the house, you can get away with as little as 5 % when you have mortgage insurance and if you get the mortgage from your regular bank, you may not have to pay any down payment at all.

Some of the types of mortgage insurance you can have include the following:

• Refundable – this means you will get back any unused portion of the premium you paid if you decide to sell the home or cancel the policy
• Nonrefundable – you will not get back any money with this type of policy and because of that the premiums are not as expensive as they are with a refundable policy.

The choices you have in how the premiums are paid also differ.

• Lender paid premiums – the lender may pay the premiums on the insurance in return for a higher rate of interest over the life of your mortgage. One disadvantage to this is that you will continue to pay the higher interest rate and you cannot cancel the policy.
• Borrower paid premiums. You pay the premiums yourself on the insurance policy. You can do this in three ways:

1. annual – the first year’s premiums are included with the closing cost of the loan and the amount of each monthly payment is added to your mortgage payment so that when the next premium is due, the money is already in your account to do so.
2. monthly- you can decide to pay the premium yourself each month. This means that your closing costs on the mortgage will not be as high.
3. single – you pay a single premium that is financed as part of your mortgage so that although it costs you extra money, you don’t have to pay any monthly or annual payments.

Most lenders have their own mortgage insurance company so that you don’t have to go searching for this kind of insurance at the same time as you are looking for homeowner’s insurance. Usually the lender will require insurance if you need to borrow more than 75% of the cost of the home or if the home is located in a high risk area. You do have to have insurance on the full amount of the mortgage and not just on a percentage of it.

When you take out mortgage insurance, it tells the lender that you are serious about investing in a home for your family. When the mortgage loan to value ratio falls below 80% you can cancel the insurance policy or request that the lender cancel if the back is paying the premium. The only thing that is taken into consideration is the unpaid balance of the mortgage and the increased value of the home does not factor into the equation at all.