Get to Know Mortgage Insurance

As in any other kind of lending and borrowing business a sort of guaranty is required by the lending party; this is to secure the money he lends out to borrowers. In this way the lender avoids the risk of loss in the event of default by the borrower. In home mortgage loans, this form of guaranty is what they call the mortgage insurance.

Mortgage insurance is required by lenders especially if the borrower cannot afford to pay the required down payment which is usually 20% of the total amount of the price of the property. Put in another view, the buyer’s equity must not be less than 20% of the value of the property, before he or she can be approved for a mortgage loan. This means that the lender will only finance 80% of the total value of the property to be purchased. In this manner the risk will be undertaken not only by the lender alone but the insurance company as well.

This mortgage insurance came about because of the fact that many lenders are not willing to take the risk or lend their money without a required owner’s equity or without any guaranty from a reliable institution such as an insurance company; this in turn have made it more difficult for home buyers to purchase a home. It may look as if you, as a home buyer, will not benefit from paying mortgage insurance, and rightly so it is, because there is nothing to be gained here. The only advantage that it can give is the fact that you as a borrower will be allowed to obtain a mortgage loan. And, the other benefit you will get is that you will be allowed to write off the mortgage insurance from your taxes as with mortgage interests paid. However, there are limitations to these deductibles; it is advisable to consult a tax professional to confirm these benefits for you.

Once you are into a mortgage insurance, there is a certain time that you can stop paying the insurance. This depends on how your mortgage contract has been stipulated. There are however some guidelines that can be applied universally in this case. In the conventional way of doing it, you are required to pay the mortgage insurance on the first year of your loan; this is for the least. When you have already paid your monthly payments for quite some time, and the balance of your loan falls below eighty percent of the total price of the home, you may request for the removal of the mortgage insurance from the lender. Most mortgage stipulations allow the request for removal of insurance at 80% balance; some at 78% balance.

In some cases, if your home value has increased over time, and it has caused your equity to rise to 20%, some lender will allow for an appraisal and they will remove the mortgage insurance. On the other hand, if your loan is guaranteed by the FHA, you will be required to pay the mortgage insurance for at least five years before you can request for a removal of the mortgage insurance payment.

Although mortgage insurance is somewhat a burden for home buyers, it is beginning to show its value in being a means to help first time home buyers to acquire their first home.




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