6 Facts About Home Mortgage Insurance
Mortgage insurance is a type of insurance that one purchases upon buying a home. Generally speaking, there are two types of mortgage insurances. The first is a voluntary mortgage, a type of life insurance. This means that if you become seriously ill or pass away, the insurance policy will cover the remaining mortgage on your house. The second type is called a personal or private mortgage insurance (PMI). This is a type of non voluntary mortgage payment that gets added on to your regular payment and protects the homeowner in case he or she cannot pay back a loan they took out to buy the home. The entire home mortgage insurance process can be long and confusing. Below are six facts about home mortgage insurance that break down the otherwise complicated concept into a simple and easy matter.
- Protects the lender, not the borrower: The thing that a lot of people misinterpret about mortgage insurance, specifically the private mortgage insurance, is that it does not actually protect the borrower (in this case, you) but the lender. In other words, if you cannot pay back a loan (under certain circumstances), the insurance will cover the amount of the loan, not for you but the lender, so that they do not lose the money they lent out. If the borrower gets sick or cannot pay the loan for similar reasons, the PMI does nothing to protect him or her. However, although the insurance technically protects the lender, you as a borrower are paying the monthly dues. In other words, when buying a home and purchasing a PMI, the new homeowner should have enough in savings to continue paying the mortgage even if he or she loses his or her income.
- PMI can be completely avoided: The personal mortgage insurance can be avoided altogether if the buyer has 20 percent or more of the house’s value available as a down payment. So, if, as a buyer, you have that kind of money or settle on a less expensive house, it is very much worth it to not get the private mortgage loan. This will eliminate extra monthly payments and any future complications not only with the mortgage payments but also with the bank who is loaning the money. Generally speaking with any type of home insurance, it is a good idea to come out with as few loans and monthly payments as possible. This will give the homeowner more freedom of action if situations in life begin to change.
- PMI can be a temporary insurance policy: Another thing that many people do not know about the personal mortgage insurance is that it is not forever. If a home was bought before July 29th, 1999, the Federal Homeowners Protection Act of 1998 requires that the personal mortgage insurance be terminated once the homeowner has reached 22 percent equity on the home. At 20 percent equity, the act gives the homeowner the right to request cancellation, though the lender does not have to honor the request. However, at 22 percent, the request must be honored by the lender. A hiccup with this policy is that all the payments that the homeowner has been making to the lender must be on time and current. In other words, there is no point in even asking for cancellation unless the owner has been making on time and full payments for at least a year.
- Lender may request appraisal upon cancellation request of a PMI: Another good thing to know about a personal mortgage insurance policy is that once the homeowner has requested a cancellation at 20 percent equity, the lender has the right to request an appraisal of the request. The lender will almost certainly request an appraisal at 22 percent equity and often times they may even get to choose the company who does the evaluation. This unfortunately means that the homeowner gets stuck with the bill. However, the reason that the lender will do the appraisal is to make sure that the home has not significantly decreased in value. Generally, most people improve their homes once they buy them, so this is not usually an issue with most homeowners.
- The regulations and terms of a PMI vary from location to location: It is important to know that PMI rules and regulations change from state to state. Many new homeowners read the rules and regulations of one area and assume that all others work the same way. However, this is not the case, as each lender in each state and country has various rules of their own and varying regulations that the government sets. This could require more background research before he or she chooses a specific lender.
- Thorough search of all mortgage life insurances can save you a lot of money: A similar concept applies for mortgage life insurance. The biggest mistake that new homeowners make with mortgage life insurance is that they do not search through all the options. Many times the lender they may be borrowing money from for a down payment or other costs may have the option of buying the life insurance from them; often times, the homeowner will simply choose this option because it came first and because it seems easy to have all of the costs in one place. However, there is a huge possibility that the lenders costs for the life insurance are much higher than what other life insurance companies may offer. This is true because life insurance companies have millions buying life insurance from them and therefore have the flexibility to adjust their rates, give deals and drop costs if it means getting another customer for a lifetime. So it is vital that the homeowner does lots of background research and gets a good look at all of his or her options before purchasing a mortgage home insurance.