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What is Mortgage Insurance?

Mortgage insurance, also called private mortgage insurance, refers to an insurance policy that is aimed to provide protection to the lender in case the borrower fails to pay his mortgages. Mortgage insurance is paid by borrowers in order to encourage lenders to offer them with financing.

Private mortgage insurance is sometimes confused with credit life insurance. However, mortgage insurance does not cover your mortgage payments every month, even if you become unemployed, disabled, or deceased. Furthermore, it also does not pay anything to you or to your beneficiaries.

Mortgage insurance is paid by borrowers who pay less than 20% of the total amount as down payment. This is required to minimize the risk on the part of the lender. The lesser the equity stake paid by the borrower, the greater the risk to the lender because the borrower will have little to lose in case of difficult times.

Although there are a lot of companies which offer mortgage insurance, it is not possible to simply shop for one with the best price because the premium costs are usually regulated. Lenders normally choose a mortgage insurance company which they already have an established relationship with, or a company which is suitable for your financial profile and type of loan.

Premium payments and private mortgage insurance policies may vary, but the most common are monthly contracts. Aside from monthly contracts, companies may also offer other options such as annual and single premium policies.

As the name suggests, monthly premiums are paid every month. This type of policy has a lower upfront payment, but the regular payments are a bit higher compared to annual policies. This is because these monthly premiums also cover the costs for record keeping as well as fund transfers.

On the other hand, annual plans are paid only once a year. When the loan is granted, the borrower will have to pay in advance the premium for the first year. After that, the servicer will still pay the premium annually, but will break it down into 12 installments and allow you to include it in your monthly mortgage. Lastly, single-premium policies require you to pay about 3% to 5% of the amount of loan until 78% of such loan has been settled or refinanced.

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References :


[0]http://www.hsh.com/finance/mortgage/what-is-mortgage-insurance.html
[1]http://en.wikipedia.org/wiki/Mortgage-backed_security

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Posted by on Sep 2nd, 2014 and filed under Business, Finance & Investing. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.