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The Basics of Home Mortgage Insurance

Home mortgage insurance comes in two varieties. The first type is mortgage life insurance and the second is private mortgage insurance. Mortgage life insurance is a voluntary program that is generally purchased by people as a hedge against disability or death, to insure that their dependents can maintain the home. Private mortgage insurance is often made mandatory by lenders as part of a mortgage contract. Here are a few things to help you consider which you need or if you will be required to purchase private mortgage insurance when you buy your home.

Private Mortgage Insurance

A borrower purchases private mortgage insurance to compensate for a low or non-existent down payment on a home. This helps assure against a quick foreclosure situation, which can cost the lender a lot of money. This insurance will cover the cost of closing and ongoing monthly payments. Occasionally a lender will provide the insurance as part of a deal, but more often than not the cost will be placed solely on the borrower.

The biggest home lenders, Freddie Mac and Fannie Mae, have established new guidelines when it comes to insurance, as a result of their near collapse. These days a down payment of up to 25% will no longer bring borrowers a lower interest rate. In light of recent experiences, these lenders now consider such borrowers just as risky as those who provide a lower down payment and take out mortgage insurance.

Currently, once a home’s loan to value equals out, borrowers are entitled by law to cancel their mortgage insurance. That is when the amount of the outstanding loan falls below 80% of the home’s appraised value. New borrowers will likely not be allowed to cancel the insurance until the loan to value falls to 50%.

Mortgage Life Insurance

Mortgage life insurance is purchased to insure that a home is paid off in the event that the borrower dies or can no longer work. This is often done to assure that survivors can keep the property without being burdened by mortgage payments. Whether or not this type of insurance makes sense in your particular case depends on factors such as age, dependents health risks and the amount owed on the home. Many people find that it’s more economical to purchase a conventional life insurance policy, part of which can be used to pay off the outstanding debt on the home. This type of payment allows the dependents to receive a lump sum payment that can be invested and earn money while the mortgage continues to be paid. If a homebuyer is unable to qualify for a traditional life insurance policy due to ill health, then a mortgage policy might be the only option. There are usually fewer health related restrictions on such policies, making them accessible to a greater number of people.