In the midst of a world-wide pandemic that has caused massive layoffs and historic unemployment is an apt time to discuss Mortgage Insurance. This is protection for when borrowers take on a home mortgage and then get sick, laid off, or for another insured reason find themselves unable to make payments to the lender.
Keep in mind, however, that Mortgage Insurance is there to protect the lender – not you. In the event that you fall behind on your payments, your credit score is still liable to take a hit and there is still a possibility – depending on the situation – that you could lose your home through foreclosure.
Let’s cover the basics.
Do I need Mortgage Insurance?
Again, mortgage insurance helps protect lenders. If you opt to go this route, it can help you secure a loan that you might not otherwise qualify for. Some loans, like FHA and USDA loans which are government-backed mortgages, will require mortgage insurance and may also require you to pay mortgage insurance premiums for the life of the loan. These are all things you should factor in your search as you decide your options.
How does this look? A typical down payment for a home with a conventional mortgage is 20 percent of the purchase price, but a borrower who doesn’t have that type of capital can reduce the down payment burden by securing private mortgage insurance (PMI). Keep in mind, though, that this route will increase the overall cost of your loan. Typically, there will be additions to the monthly payments to the lender and often added costs at closing.
The actual premium requirements and any upfront costs will depend on the loan type, loan terms, and your risk level. So, as with all topics on this site, it is advised to do extensive research as well as speak to an agent to fully understand the best options for your situation.
Is mortgage insurance worth the cost?
As with all insurance policies, there is no one-size-fits-all answers. As you are weighing your options to the type of home loan you want and if private mortgage insurance is right for you, it is important to look at the costs and benefits of such a plan.
Pros of mortgage insurance:
- Assistance securing a loan — mortgage Insurance may bolster your eligibility for a loan if you are unable to meet a lender’s typical requirements for a 20 percent down payment.
- Terms can be temporary — often, PMI on conventional loans can be renegotiated or dropped once 20 percent equity in the home is reached.
- Peace of mind — in a worst-case scenario, mortgage insurance policies can help your family keep your home.
- Lower interest rates — because mortgage insurance protects the lender, a potential for interest rate relief is possible as a policy reduces lender risk.
Cons of mortgage insurance:
- Cost — PMI coverage will be added to your monthly mortgage payments.
- Exceptions — Mortgage life insurance policies can be saddled with many exceptions that can affect the terms of coverage.
Other options of mortgage insurance:
Traditional life insurance policies offer more coverage at a lower cost than most mortgage insurance offers, but not everyone can qualify or the coverage may not be adequate.
Whether you are hoping to qualify for a lower down payment or your home loan specifically requires it, mortgage insurance is there to compensate lenders in the event that you can’t make payments or default. As always, understanding your situation and options is the best way to make informed decisions and ensure you and your family are protected in the case of an emergency.
If you are looking for more details about Mortgage Insurance coverage, or how you can ensure your mortgage insurance policy is current and you are protected, contact our office: