Source: Insurance Business Mag —
Lenders typically require home buyers to provide a down payment equivalent to 20% of the property’s purchase price to qualify for a loan. This amount, however, which can easily hit upwards to the tens to the hundreds of thousands of dollars, can be out of reach for many.
Enter mortgage insurance.
This type of coverage allows aspiring homeowners to get approved for a loan with as low as 3% down payment. The insurance helps you secure the loan with the backing of the insurance agency protecting the lender.
In this article, Insurance Business discusses how mortgage insurance works in different loan types, how premiums are calculated, and whether home buyers can avoid paying for this additional expense. This can also serve as a useful guide for those wanting to start their homeownership journey, so we encourage insurance agents and brokers reading this to share it with clients considering starting this journey.
What is the purpose of mortgage insurance?
While mortgage insurance enables home buyers who do not have sufficient funding for a traditional down payment to get loan approval, it does not cover them if they fail to meet monthly repayments.
Mortgage insurance is designed solely to protect the lender if the borrower defaults on their home loan.
By reducing a lender’s risk, this form of coverage also allows them to lend larger amounts and approve more home loan applications.
In order for homeowners to get protection should circumstances render them unable to pay out the remainder of their home loans, they need to purchase another type of policy called mortgage protection insurance (MPI).
How does mortgage insurance work?
Lenders typically arrange mortgage insurance on the borrowers’ behalf. And although such policies cover the lenders, it is the borrowers who shoulder the cost of premiums. There are generally two types of mortgage insurance. These are:
- Private mortgage insurance (PMI) for conventional mortgage
- Mortgage insurance premium (MIP) for federally backed home loans
Mortgage insurance works slightly differently depending on the type of loan. Here’s an overview of each.
Private mortgage insurance
Lenders impose PMI as a requirement for conventional loans where a borrower puts out a down payment of less than 20% of the home’s purchase price. This type of mortgage insurance may also be required if a borrower decides to refinance their mortgage and the equity built up is less than 20% of the property’s value.
PMI comes in four types based on how premiums are paid:
- Borrower-paid monthly: The most common type of PMI wherein the borrower pays monthly premiums as part of their mortgage
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