Mortgage insurance is one of the few types of insurance policies that provides absolutely no benefit to the person paying for the policy. Then why would anyone in their right mind even consider purchasing mortgage insurance? The truth is sometimes, they do not have a choice.
Mortgage insurance policies were created solely with protecting mortgage lenders in mind by protecting them from losing money when a home buyer defaults on a home loan or mortgage. If the home buyer stops paying on their mortgage because of loss of employment, death or some other unforeseen circumstance, mortgage insurance ensures that the lender will still be paid in full for the balance owed on the property. The premiums are paid by the borrower and the lender is listed as the beneficiary on the policy.
The good news is that mortgage insurance is not always required when purchasing a home. There is an exception to this rule and that exception is when the down payment on the home is 20% or more of the sale price. If the down payment is less than 20% – you will have to have mortgage insurance. However, you don’t have to shop around for your own policy, which is good. The lending company will usually find an insurance company for you, which isn’t good because you can’t compare premiums and ensure you are getting the best rate.
Even if it turns out you do have to have mortgage insurance, you may not have to keep it for the entire length of your mortgage. Mortgage insurance is a must for the first year of your loan, regardless who your lender is. If you have an FHA loan, you are required to keep your mortgage insurance for a full five years. Aside from these two stipulations, the length of time mortgage insurance is required will depend on how your contract is worded.
However, many lenders allow you to submit a request in writing to drop mortgage insurance once you have paid the balance to below eighty percent of the home’s sale price or appraised value. There is no guarantee the request will be granted, but more often than not, they are. This is why it’s imperative to know exactly what your contract says and to keep tabs on your mortgage balance so that you can address dropping the mortgage insurance at the first opportunity.
Even though mortgage insurance may seem like an unnecessary evil, the truth is it does actually benefit first time home buyers in a roundabout way. If home loan lenders had no protection against defaults, they would be forced to raise their percentage rates and their qualifying criteria, which would put owning a home out of the grasp of many would-be home owners. Instead, with the assurance that their investments will be protected, home lenders can be a little more forgiving when it comes to percentage rates, eligibility requirements and other qualifying factors that come into play when financing a home.
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