Mortgage Insurance

Mortgage insurance (MI) is a contract purchased by borrowers that offers security for their lenders. When borrowers, the people purchasing mortgages, take on mortgage insurance their lenders, typically banks and financial institutions, are insured against loss.

Loss is generally caused by a borrower's default, which means that they were for some reason unable to pay the lender.

Mortgage insurance can be issued by private companies or by government agencies such as the Federal Housing Administration and it can cover either a percentage of a person’s mortgage or the entire mortgage amount depending on which type of insurance the borrower qualifies for.

Mortgage insurance is typically required on mortgages where the borrower has put down less than 20 percent of their house’s purchase price in a down payment.

Federal Housing Administration mortgage insurance usually calls for a payment of 1.5 percent of the mortgage loan amount to be paid at closing. This type of mortgage insurance also has an annual fee of 0.5 percent of the mortgage loan amount that is added to each monthly payment. Almost anyone with a good credit record and sufficient steady income can be approved for an FHA-insured mortgage.

With most mortgage insurance the borrower will purchase the insurance and an initial premium will be collected at closing, which occurs when the sale of a property is finalized. Depending on the mortgage insurance premium plan, a monthly amount may be included in the house payments, which the lender will give to the insurer.

Typically mortgage insurance is paid off either annually, monthly or with a one time single lump payment.

Some mortgage insurance plans allow borrowers to choose between having refundable or nonrefundable premiums. Refundable premiums allow borrowers to have a chance at receiving money back on unused portions of their mortgage insurance if the insurance coverage is discontinued before their mortgage is fully paid. Nonrefundable premiums cost less than refundable premiums but if coverage is discontinued on mortgage insurance with this type of premium the borrower does not get a refund at all.

Mortgage insurance fills the gap between what the lender feels is a necessary down payment and what the borrower feels they can afford. Supplementing a low down payment with mortgage insurance allows borrowers to purchase homes that they otherwise would probably not be able to afford.

Many homeowners will need to purchase mortgage insurance because the majority of houses these days cost well over $150,000. For a home that is $150,000 the homebuyer would most likely have to put $30,000 down as a down payment. Unless you have an extremely well paying job or a stash of investments $30,000 is an exorbitant amount have saved.

One way to avoid paying mortgage insurance is to accept a higher interest rate on your mortgage. The exact amount that the interest rate increases will usually depend on the size of your down payment.

Mortgage insurance should not be confused with mortgage life insurance. Unlike mortgage insurance, mortgage life insurance can pay all or a portion of your mortgage in the event of your untimely death.

Keep in mind that if you take up mortgage insurance you will be doing so to protect your lender not yourself so it is important to try and get rid of your mortgage insurance payments as soon as you can by paying off your lender as quickly as possible. With private mortgage insurance (PMI) you are only required to make payments on your insurance until you have paid back 80 percent of the principle of your mortgage. Most lenders should give you an idea of how long it will take you to pay back 80 percent and they should cancel your PMI when you have paid back 78 percent.

Even though mortgage insurance can be costly in the long run it does offer many people, who could otherwise not afford it, the chance to own a home.