Many homeowners got their houses through a mortgage, and mortgage insurance is put in place to protect the money lending company, be it a bank or other institutions.
A mortgage is a loan given by a bank, mortgagor, or any loan institution, that enables an individual to repair or buy a house, land, or any real estate. Usually, the property that the loan is collected for is used as collateral.
The loan is paid back through a series of payments, which could be monthly or yearly, within a time frame.
Mortgage insurance is insurance that protects the mortgagor if the home buyer falls back on payment, dies, or for any reason is unable to meet the agreement in the contract.
It is used as a protection for the lender in case of loss
Types of mortgage insurance
There are three classifications namely.
Private Mortgage Insurance (PMI): This type of insurance is usually required by the mortgagor from the borrower as a condition to get a conventional loan. The mortgagor makes arrangements for the PMI and the services are provided by s private insurance company.
PMI is required if the homeowner pays less than a 20% initial deposit of the conventional loan. PMI differs according to initial payments and credit score.
Qualified Mortgage Insurance Premium (MIP): obtaining a mortgage backed by the Federal Housing Administration (FHA), automatically means the homeowner is to pay MIP. With MIP, anyone with an FHA mortgage purchases this type of insurance, regardless of the size of their down payment or credit score.
Mortgage Title Insurance: with mortgage Title insurance, there is protection for the mortgagor if the sale of the property becomes invalid as a result of title issues. It protects the mortgagor in the event that at the time the property is bought, someone else has ownership of the property. Although before the finalizing of the contract, investigations are made on the property and its documents, some of these issues could be missed, that’s why mortgage title insurance is important.
How mortgage insurance work
When you take out a mortgage, getting insurance for it is usually one of the requirements if you are getting an FHA loan or paying less than a 20% initial deposit on a conventional loan.
For a conventional mortgage, the mortgagor requires insurance if you make an initial payment of less than 20%
For FHA loans(loans supported by the federal government), mortgage insurance is required whether you pay less or more than 20% of the initial deposit.
For USDA(loans supported by the US Department of Agriculture) and VA(loans supported by the Department of Veteran Affairs), they do not require mortgage insurance but you pay some amount of money as protection to the mortgagor in case you fail in payment.
In summary, you bear the cost of the mortgage insurance meant to cover the mortgagor.
When do I stop paying mortgage insurance?
Paying mortgage insurance on a property increases the total monthly payment you have to make on the property.
There are ways one can eliminate mortgage insurance.
For conventional loans, once the homeowner pays off 22% of their loan, the PMI is automatically removed. Also when the homeowner has paid off 20% of their loan they can contact their mortgagor to stop their PMI.
For FHA loans, the MIP lasts for as long as the loan last or after 11 years if you pay 10% or more of your initial deposit. One way to remove MIP is to refinance into a conventional loan.
For both conventional and FHA loans, one can refinance into a non-PMI or MIP loan. Although the interest rate of non-PMI or MIP loans may be higher, it still reduces the monthly overall payment made.
Mortgage insurance and mortgage life insurance are two different policies, while mortgage insurance protects the mortgagor, mortgage life insurance protects the heirs of the homeowner in case he dies.