Mortgage Insurance explained
Mortgage insurance is a type of financial protection offered to homebuyers who do not have conventional down payments.
Mortgage insurance is typically offered by the lender or through the federal government. Federal mortgage insurance comes in two flavors:
1) Government-backed seller's mortgage insurance (GMSMI) which can be financed into the loan; and
2) Homeowner's mortgage insurance (HMI), which must be paid up front and then reimbursed upon sale of the home or refinancing.
Both types indemnify lenders against losses in cases where buyers default on mortgages, making it easier for qualified applicants to secure loans.
There are also variations from state to state in the types of mortgages/mortgages that can be insured, and the amount of protection that can be obtained.
Mortgage insurance is a way for lenders to protect their investment in real estate, which is generally valued at more than the money deposited as a down payment; the mortgage insurance protects both the principal amount of the loan and the interest; but only if you sell your home someday.
This could happen in two ways:
1.) When you sell your home (and you were able to pay off your mortgage ), or
2.) When you refinance your mortgage (and move up to a better interest rate).
Mortgage insurance can be written into the loan in one of two ways:
1.) "Guar- antee only" – This means that the amount of insurance is at the discretion of the lender.
2.) Money-back policy – This means that the policy will pay you back according to a formula set by the lender. The amount varies depending on a number of factors including:
a) when you purchased your house or refinanced,
b) what type of mortgage you have (residential, commercial, etc.), and
c) what type of home you own (single family home, condo unit, townhouse).
Source: http://www.learnvest.com/2012/10/mortgage-insurance-explained/
Mortgage insurance is an important part of the mortgage process, but many homeowners never think about it until they are faced with making a large down payment on their mortgage. When you put less than 20% down on your home, your lender will normally require you to pay for private mortgage insurance as well as an upfront premium .
This cost is typically added to the total loan amount when you borrow from a lender and paid in a lump sum with other closing costs at the time of closing.
But if you are planning to make a larger down payment, or you are looking for a mortgage that can handle higher annual payments, then you may want to ask your lender about paying for private mortgage insurance up front.
Many lenders offer mortgages with no down payment and no private mortgage insurance cost upfront. If you have a good credit score and enough income to make the mortgage payments, why pay for extra protection that is not needed? However, sometimes even with a good credit score it is still better to pay the upfront premium rather than letting the lender decide whether or not it will pay out on your claim.
There are two types of mortgage insurance coverage:
1.) Full Payment Mortgage Insurance (FPMI) – This type of mortgage insurance is available when the amount you are borrowing is at least 80% of the home's value. This means that you pay for the mortgage insurance with a cash payment after closing.
2.) Partial Payment Mortgage Insurance (PPMI) – This type of mortgage insurance is available when the amount you are borrowing is less than 80% of the home's value. In this instance, you pay for this coverage up front, before closing on your home.
Which type of mortgage insurance you will be required to pay is dependent on the lender, your loan program and other factors.
If you are not sure whether or not you are required to pay for full payment or partial payment mortgage insurance, be sure to ask your lender during the mortgage process.
Some lenders will offer this coverage at the time of closing, but if they do not have a policy in place the funding may be delayed until after the closing date.
For more information on private mortgage insurance and how it can affect your home purchase check out our Private Mortgage Insurance vs. a 20% Down Payment article .
Mortgage insurance is available in two forms: single premium mortgages and contractual obligation mortgages .
Single premium mortgages are available as 30-year and 15-year fixed rate mortgages. The borrower pays a lump sum for the mortgage insurance at closing.
When it comes to no money down mortgages, the requirement is generally 130% of the appraised value of the home. For example, if your home appraisal is $100,000 you would need to finance a loan amount of at least $130,000 to have mortgage insurance protection when you buy a house with no money down .
Contractual obligation mortgages are only available for 95% financing for up to 10 years on newly constructed homes in high price areas .
To get these types of mortgages you will also have to pay an upfront mortgage insurance premium.
Source: http://www.mortgageassist.com/mortgage-insurance-explained.php?page=1
Mortgage lenders require homeowners to take out mortgage insurance on the loan they are taking out for their home purchase, so that they can later sell their home and come out of debt in case of a default. Most mortgage lenders offer two types of mortgage insurance programs: private mortgage insurance (PMI) and wrap programs. Private mortgage insurance covers the lender in case the homeowners default on their payments. Wrap programs are offered by certain banks and credit unions to cover the entire loan. The main difference between private mortgage insurance and wrap programs is that private mortgage insurance is paid by the homeowners of their own accord, while wrap programs are financed in the loan. This information will help you decide on which program is right for you.
Basically , mortgage insurance protects both the borrower and lender in case of default . Homeowners may choose to take out private mortgage insurance because it often adds to their home buying power; this type of insurance can cover up to 20 percent of the home's value. Another reason why homeowners choose private mortgage insurance is that it lowers their monthly payments, giving them more savings for other things .
Conclusion : The home buying process can be a difficult one for most families, but it is made much easier when you are working with a mortgage lender that has your best interests in mind. You may need to educate yourself on how mortgage insurance works before you can make the right choice, but if you do your homework you…
Now that we know more about mortgage insurance and how it works, let’s take a look at the types of program there are.
The two basic kinds of mortgage insurance are private and government (government-sponsored enterprise – GSE) . You can take out one of these two options or both — and there are many different variations within each type.