What is mortgage insurance? Mortgage insurance is insurance that protects a mortgage lender against borrower default, death, or if the borrower is unable to meet their contractual obligations on the mortgage. Mortgage insurance can refer to PMI (private mortgage insurance), qualified mortgage insurance premium (MIP), or mortgage title insurance. If there is a loss on the mortgage, these premiums allow the lender to be made whole again.
Mortgage insurance is typically paid on a monthly basis. It is applied on loans that are less than 80% of the market value. For example, if a person acquires a loan on a house for $300,000, the lender must put down $60,000 to avoid paying mortgage insurance. If the person pays more than $60,000, then they avoid having to pay mortgage insurance. It should be noted that once a person has paid of 20% of the loan value, they can request that the insurance policy be cancelled.
Private Mortgage Insurance
Private mortgage insurance is a type of insurance that the lender will require a borrower to purchase as a condition of a conventional mortgage. The insurance is designed to protect the lender and not the borrower. It is arranged by the lender and offered by private insurance companies.
PMI is used on loans where the borrower pays less than 20% of the purchase price. It can also be used in cases where the borrower is refinancing their mortgage and the equity in the house is less than 20% of the house’s value.
Qualified Mortgage Insurance
Qualified mortgage insurance is mortgage insurance provided by the Department of Veteran Affairs, the Federal Housing Administration or the Rural Housing Service or a private mortgage insurer. It is similar to PMI. With an FHA mortgage, which is backed by the U.S. Federal Housing Administration, one pays for mortgage insurance regardless of the down payment.
It should be noted that the amount of insurance premium that one pays is tax deductible. It is best to consult with a qualified tax professional regarding the tax consequences of paying a qualified mortgage insurance premium.
Mortgage Title Insurance
Mortgage title insurance protects the borrower against loss when a sale is invalidated due to problems with the title. The insurance protects the beneficiary, usually the buyer, if it is determined that someone other than the seller owns the property.
Usually a title search is conducted by a title company employee or a lawyer before closing on a sale. A proper title search helps determine if there are any liens on the property and that the real estate being sold belongs to the seller.
Mortgage Protection Life Insurance
Mortgage protection life insurance is a policy that is designed to protect heirs if the borrower dies while owing mortgage payments. It is designed to protect the borrower’s ability to repay the mortgage for the lifetime of the mortgage. The policy pays off the lender or the heirs, depending upon the terms of the policy.
Avoiding Mortgage Insurance
In order to avoid paying mortgage insurance there are a number of ways to achieve this.
One can put down more than 20% on the home purchase and avoid mortgage insurance altogether.
Some states have programs available for first-time home buyers that allow them to avoid paying mortgage insurance. These programs also help home buyers put down little money on their home purchase.
If neither is possible, then the home buyer should factor in the cost of PMI into their home purchase. The other option available is that the home buyer can factor in the cost of the VA funding fee or the USDA fees when examining the purchase.