What does Mortgage Insurance Cover?

If you are planning to buy a house and have less than 20% down payment, mortgage insurance can be a great option for you. Let us dive deep into understanding what mortgage insurance is, how it works, and what it covers.

Understanding Mortgage Insurance

Mortgage insurance is an insurance policy that protects the lender in case the borrower defaults on their mortgage loan. If the borrower fails to make payments on their mortgage, the lender can file a claim with the mortgage insurance company and recover a portion of the funds they lent out.

The mortgage insurance premium can be paid upfront, monthly, or sometimes as a combination of both. The premium amount may vary depending on the size of the down payment, type of mortgage, and your credit score.

How Does Mortgage Insurance Work?

When you take out a mortgage, you might have to pay for mortgage insurance if you put down less than 20% of the home’s purchase price. The insurance policy is purchased by the borrower, but it covers the lender if the borrower defaults on the loan.

The mortgage insurance company will pay the lender a certain percentage of the outstanding balance on the loan if you stop making payments. This is to ensure that the lender is not left with a loss if you default. For example, if you owe $200,000 on your mortgage and you default, and the mortgage insurance policy covers 25% of the loan balance, the insurance company will pay the lender $50,000.

The lender can then either use this payment to pay off the mortgage, sell your house to cover the remaining balance, or foreclose on your property.

Types of Mortgage Insurance

There are two types of mortgage insurance: private mortgage insurance (PMI) and government mortgage insurance.

• Private Mortgage Insurance (PMI): PMI is required for conventional loans that have less than 20% down payment. The premiums can be paid upfront or monthly.
• Government Mortgage Insurance: This is required for government-backed loans such as FHA loans and VA loans. The premiums are usually paid monthly, as a part of the mortgage payment.

What Does Mortgage Insurance Cover?

Mortgage insurance covers the lender, not the borrower. It does not provide any protection to the borrower in case of default.

The mortgage insurance policy covers a percentage of the loan balance, generally between 20% to 30%, depending on the policy. It also covers any fees or penalties that the lender might incur during the foreclosure process.

What is Not Covered by Mortgage Insurance?

Mortgage insurance only covers the lender in case of default. It does not cover the borrower’s equity in the property, any missed mortgage payments, or any other debts associated with the property.

Additionally, mortgage insurance does not cover any repairs or maintenance costs in case of damage to the property. It also does not cover any unpaid property taxes or utility bills.

Frequently Asked Questions (FAQ)

1. Is mortgage insurance required?

If you have a conventional loan and put down less than 20% of the purchase price of your home, then mortgage insurance is required. If you have a government-backed loan like an FHA loan, then mortgage insurance is also required.

2. How much does mortgage insurance cost?

The cost of mortgage insurance depends on several factors, including the size of your down payment, the type of loan, and your credit score. Typically, the premium can range from 0.3% to 1.5% of the loan amount annually.

3. How long do I have to pay for mortgage insurance?

If you have a conventional loan, you can request to have your mortgage insurance canceled once you have built up at least 20% equity in your home. If you have a government-backed loan, mortgage insurance may be required for the life of the loan.

4. How do I know if I have mortgage insurance?

You can check your mortgage documents or contact your lender to find out if you have mortgage insurance. Some lenders also include the cost of mortgage insurance on your monthly mortgage statement.

5. Can I get rid of mortgage insurance?

If you have a conventional loan, you can request to have your mortgage insurance canceled once you have built up at least 20% equity in your home. You can also refinance your mortgage to remove the mortgage insurance. If you have a government-backed loan, mortgage insurance may be required for the life of the loan.

Conclusion

Mortgage insurance is an excellent option for those who cannot make a down payment of at least 20%. It provides protection to the lender in case the borrower defaults on the loan. However, it does not provide any benefits to the borrower, and the premiums can add up over time. Ensure that you understand the terms and conditions of your mortgage insurance policy before you sign up for it.