Do You Need Mortgage Insurance

There often appears to be a misunderstanding about mortgage insurance, especially with first time homebuyers as to exactly what mortgage insurance is and why they need it. The number one reason for this is because many consumers confuse mortgage insurance with mortgage life insurance. They are two totally different types of insurance and both policies can actually be taken out at the same time and run concurrently. One type protects the lender while the other protects the property owner and his/her heirs, but both policies are generally paid for by the borrower.

Mortgage Insurance Protects the Lender

By understanding what mortgage insurance is, it is possible to also understand why a lender would require it on a new loan. Quite simply, mortgage insurance is written to protect the lender should the borrower default on the loan. It is insurance to mitigate future risk of loss which the lender would be exposed to as a result of nonpayment of mortgage premiums. Any loss would be then spread between the insurance company and the lender. This type of insurance may also be called mortgage loan insurance as it is in force to insure the loan (and lender) not the borrower.

Mortgage Life Insurance Protects the Buyer

Mortgage life insurance, on the other hand, is a policy that pays the lender in full should the borrower pass away prior to satisfaction of loan. This is extremely important for homeowners who have a family that is dependent on them. If they meet with an untimely death, and the surviving spouse is unable to keep up mortgage payments, the home could be foreclosed on and the family would be left homeless. Mortgage life insurance may be referred to as mortgage term life insurance or mortgage return of premium life insurance. In any case, it protects the borrower’s heirs upon his or her death if there if the mortgage loan is still in force.

When Is Mortgage Insurance Required?

Not all mortgage loans and/or lenders will require mortgage insurance under certain circumstances. While requirements will vary from lender to lender, a rule of thumb to gauge whether or not you will likely be required to carry mortgage insurance is dependent on the down payment in relation to the value of the property. This is calculated with something called the LTVR, or loan to value ratio. Traditionally, lenders required 20% down and would only finance 80% of the property’s market value. Because this practice made it almost impossible for a great percentage of home buyers to purchase homes, they have become more willing to hold a mortgage if there is a 10% down payment at closing. Mortgage insurance guarantees the loan will be repaid should the buyer default.

How Much Will I Pay for Mortgage Insurance?

The easiest way to calculate how much mortgage loan insurance will cost you is to use an online mortgage insurance calculator. The computations could be quite complex based on a number of factors, so many lenders will provide online calculators for consumers to use when looking to buy a property. This way they can get a better idea of what monthly payments will be based on figures they plug in. There are two ways in which this insurance can be paid and that is annually or monthly as part of the mortgage premiums. In either case, the first installment (monthly or annual) will be taken out at time of closing. Mortgage loan insurance rates are based on a percentage of the loan in relation to LTV, and may vary from insurance company to insurance company. Most often, the lender will stipulate an insurance company to underwrite the policy.

Although borrowers have every intention of making timely payments on loans, unforeseeable events can prevent that from happening. For this reason, most lenders will require mortgage insurance at least for the first year of the loan, and perhaps longer depending on the LTVR. Without mortgage loan insurance many first time homeowners would not be able to purchase a home, or would need to save for a number of years to accrue the required 20% down payment. It may seem like an unnecessary and unwanted expense, but without it you may not qualify for the loan.