Mortgage Insurance

Mortgage insurance is required when your down payment on your home is less than twenty percent of the appraised value. Many mortgage insurances are referred to as private mortgage insurance. These are different from FHA and VA insurance. The government provides FHA and VA insurances. The cost of the mortgage insurance will vary depending on the size of loan and the down payment that is provided. The cost will typically be about one half of one percent of the mortgage.

With this insurance, the borrower pays premiums, however the lender is the beneficiary. This coverage will help to protect lenders if the borrower goes into default. If the borrower were to stop making their mortgage payments, the insurance company will ensure that the lender is paid for the mortgage. Many mortgage lenders will choose insurance providers for their client and the borrower is required to make monthly payments. The lender may also offer a program where the borrower pays the entire amount of the insurance premium at the closing of the home.

Many lenders will waive the insurance if the buyer will accept a higher interest rate on the mortgage. This rate may increase from three-quarters of a percentage point to a full percentage point. Borrowers may benefit from this, as the interest is tax deductible, however, the borrower must also be able to afford the high interest rate associated with the mortgage. If the borrower elects to take the higher interest rate, the bank will still purchase the insurance. The higher interest rate will cover the cost of the insurance plus a profit margin. Because the interest is tax deductible, it is important to realize that if you are in a higher tax bracket, then you will receive a greater benefit from the higher rate versus the insurance.

It is also important to know that Congress has mandated that loans closed after July 29, 1999, the mortgage insurance must be cancelled if the borrower requests it and if the loan is paid down to eighty percent of the original property value. The insurance must also be terminated when the balance reaches seventy-eight percent of the value. The insurance on the loan sold by lenders to Fannie Mar or Freddie Mac must also be cancelled when the loan balance reaches eighty percent of the current property value including appreciation.

Another option for affording the insurance is to use an 80-10-10 loan. This is actually two loans in which the borrower receives a first mortgage for eighty percent of the sale price, a second mortgage for another ten percent and will put the remaining ten percent down at closing. The second mortgage will have a higher interest rate. Because the rate only applies to ten percent of the loan, the monthly payment on the two mortgages should still be lower than the monthly payment of the mortgage plus insurance. Interest on the second mortgage is also tax deductible.

In most cases, the higher interest rate is a poor choice if you intend to stay in the home for a long time period. Those individuals that only plan to live in the home for a short while will receive a greater benefit from taking the higher interest rate versus making the insurance premium payments.