Mortgage Insurance
Many homebuyers confuse mortgage insurance and mortgage life insurance, which are very different products. Mortgage life insurance pays off a mortgage in the event of a borrower's death. It protects the buyer.
Mortgage insurance protects the lender from the perceived additional risk associated with low down payment loans. It benefits homebuyers by enabling them to buy a home with less than a 20% down payment. Mortgage insurance is required on all loans with less than a 20% down payment and on FHA loans. It is paid monthly, and the premium is determined by the size of the down payment. Most lenders require two months’ premium to be pre-paid at closing.
This insurance protects the lender in the event of default. Should one fail to make their payments and the lender forecloses, the mortgage insurance is paid to the lender to offset some of their losses.
Once the loan balance is paid down to less than 75% or 80% of property value, one can cancel the mortgage insurance. In fact, lenders are required to automatically terminate mortgage insurance for many borrowers when their balance has been paid to 78% of the original property value.
On a $100,000 loan: here is the monthly payment you will be making for mortgage insurance:
Loan Amount |
Down Pmt. |
Monthly Mortgage Ins. |
$100,000 |
5% |
$51.00 |
|
10% |
$38.00 |
|
15% |
$20.00 |
