What you should know About Mortgage Insurance
Everything is insurable these days and that includes insurance for your mortgage. Mortgage insurance is a policy that will compensate investors or lenders for losses due to the default of a mortgage loan.
Mortgage insurance began in the United States in the 1880’s. The first mortgage law was passed in New York in 1904. The mortgage industry grew in response to the real estate bubble that occurred in the 1920’s. The mortgage industry was bankrupted by the Great Depression, which was due partly to mortgage pools. In 1934 the Federal Government began insuring mortgages throughout the Federal Housing Administration.
Most lenders require mortgage insurance if the loan amount exceeds 80% of the mortgaged value of the property in question. Mortgage insurance is not always a requirement for subprime mortgages. In this case the mortgagee will most likely pay a higher premium rather than mortgage insurance. The insurance is more for the lender than the mortgagee. With mortgage insurance in place the loan is guaranteed. If the mortgage goes into default and the lender retains and sells the property for what they can get for it. If they receive less than the mortgage value of the property after the sale, the mortgage insurance will cover the rest so the lender gets back all the money they lent out minus some administrative fees.
The borrower is required to pay for the mortgage insurance premium each month and it is added into their mortgage payment. They must pay the insurance until they have gained sufficient equity in the property and the balance of the loan is less than 80% of the value of the property. Some lenders require a borrower pay the mortgage insurance for a certain period of time despite reaching the 80% threshold. The borrower can also request the mortgage payments be stopped before that certain time period is up by demonstrating the value is below 80%. Usually, one of the requirements is the payments were made on time part of the decision
The cost of the mortgage insurance varies depending on the lender and the insurance company involved. The premium also depends on the loan to value ration and the premiums may decrease as the loan amount decreases. Credit history and established risk factors of the borrower will also impact the mortgage insurance premium.
Mortgage premiums may also be factored into the borrower’s debt to income ratio. It is possible with mortgage insurance premiums a borrower does not qualify for the loan. An alternative is to qualify for a subprime loan and be relieved of the responsibility of the mortgage insurance, but you may still be paying a higher mortgage rate because no mortgage insurance is in place.
Private mortgage insurance is often required if the mortgagee pays less than a 20% down payment. The premium may be paid in one lump sum payment, paid annually or monthly or some combination of the two. Payments at one time were tax deductible but that is no longer the case.