Mortgage insurance is a financial tool that protects lenders, and can increase the buying power of borrowers. However, many borrowers are suspicious, and rightly so, of any additional fee or cost attached to their mortgage. This article will look into answering some of the most frequently asked questions on mortgage protection insurance: what it is? Who is it for? How can it benefit borrowers? And, who pays for it?
What is it?
Mortgage protection cover is a security that protects lenders in the case of a borrower defaulting on his mortgage payments. If a borrower defaults on his mortgage the title to the property goes to the lender, however there are many expenses associated with this operation, which are often left to the lender to pay. Private mortgage insurance reduces or even eliminates this risk to the lender by covering these costs. It is important to understand that home mortgage insurance is not the same as home insurance. It does not provide insurance for the house. It is simply a security for the lender in case the borrower forecloses on his mortgage.
Who is it for?
As mentioned above, the insurance is actually for the lender. The borrower does not benefit directly from the cover it provides. However it can be of benefit to all home buyers in an indirect way.
How can it benefit borrowers?
It allows people to buy a home sooner. This is because borrowers with mortgage insurance can put down a lower down payment. Lenders are willing to accept down payments as small as 5% or 10% if the borrower has insurance. Without it borrowers are expected to pay at least 20% up front. This can make the difference between being able to afford a new home or not. Borrowers can also use the lower down payment to buy a more expensive home or to pay for moving expenses.
Who pays for it?
The borrower does. There are a number of premium plans though, that adapt to the borrowers personal circumstances. You can pay annually, monthly, or even with one single premium. Single premiums are a onetime payment that covers the mortgage for the entire lifetime of the mortgage. This type of premium is generally financed by the mortgage itself which means that the borrower does not “feel” the cost of insurance as much.
Mortgage insurance is yet another expense for borrowers, but it does provide benefits. First of all it helps lenders accept loan applications from higher risk borrowers. Second it allows borrowers to pay a lower down payment on their home, helping them to buy a home sooner. However, not all borrowers need to pay for it. Borrowers with a high credit rating should be able to find lenders that do not require them to buy it.