If this is the first post you’re reading on our blog, Welcome! This post, what is mortgage insurance, is designed to be consumed after reading the “Intorduction to Conventional Mortgages” and “Introduction to FHA Mortgages.” Those posts set the foundation for how mortgage insurance is calculated and used in the mortgage industry. This post might be best understood if read after reading one or both of those. That said, let’s jump right in.
Mortgage insurance is an insurance policy designed to compensate the lender in the event of a loss. For context, it might be best to take a step back here. Risk is the metric the mortgage industry is based upon. The document collection, scrutiny of your credit report and seemingly endless requests for more and more information is done in the name of risk analysis. The lender is looking to determine how you earn the money you will be using to pay the loan back and how likely it is that you will make all of the agreed upon payments on time.
Mortgage insurance is paid by the buyer, on behalf of the lender. It is like an appraisal in that regard. If your loan requires mortgage insurance, it will be collected as either a part of your monthly payment, or a closing cost. It’s squirreled away in a non interest bearing account for the bank, just in case you foreclose.
Why Mortgate Insurance?
You might wonder why anyone would sign up for a loan with mortgage insurance? Well, it will allow you access to a loan or a market that you may not otherwise have access to.
Here, we will focuse on the mortgage insurance on a conventional loan. If you are getting a conventional loan, and putting down less than 20% as your downpayment, you will generally be required to get mortgage insurance.
If you get a Conventional loan, that requires mortgage insurance, you will have Private Mortgage Insurance or PMI. This is mortgage insurance administered by a private company. The amount you will pay in PMI is dependent on the amount of money you put down and your credit score. There is generally an option to pay all of the PMI up front, spread it out monthly or pay a portion up front and a portion monthly. The latter is called split premium. Generally, PMI on a conventional loan is less expensive than that on an FHA loan. You can also apply to get rid of your PMI after you have a certain amount of equity in your home.
One of the most common mosiconceptions of mortgage insurance is that it somehow protects the buyer. It does not. Mortgage insurance is the banks insurance, a way to make them whole, should the buyer stop making payments and walk away from the home.
Have a better understanding of PMI? Ready to apply for a home loan? APPLY NOW with me at Primary Residential Mortgage