What is home loan insurance?
TLDR: Home loan insurance is protection for your lender in the event that you fail to pay one of your mortgage payments. Mortgage insurance does not directly benefit you, however you pay for it based on the amount of money you put on your loan as a down payment. You can find out an estimate of how much you’ll pay for home loan insurance by looking at your credit history and other factors.
When most people think about insurance, it’s to protect a piece of property or valuable item that they own. There is another form of insurance available which you may not know about, that insurance is known as home loan insurance. Home loan insurance does not in any way provide any direct protections for you or your property. Alternatively, home loan insurance is designed to protect the lender from home owners who may default on their payments.
While home loan insurance doesn’t directly benefit you, you will likely be the one who pays for it. To help you gain a better understanding as to exactly what home loan insurance is, we’re going to give you a detailed explanation of exactly what it is and how it works.
Continue reading below so that you can learn more about what home loan insurance is and how it impacts you.
Exactly what is home loan insurance?
Home loan insurance is also commonly referred to as mortgage insurance. Home loan insurance pays your lender a percentage of the principal amount in the case that you fail to make one of your payments on time. There are two main types of mortgage insurance that exists and the type of home loan that you take out will determine the category of insurance that your lender takes out against your mortgage terms.
Here are the two main types of home loan insurance:
- MIP- MIP stands for portage insurance premium and this is the type of mortgage insurance taken out on homes that use FHA government backed loans. FHA loans require an upfront mortgage premium to be taken out once the loan is approved in addition to an annual premium.
- PMI- for private mortgages, PMI insurance is usually required if your down payment is less than 20%. This insurance type if calculated into your monthly mortgage payments
These are the two main types of portage insurance that you’ll encounter when applying for a home loan. If you’re unsure about the type of home loan insurance that you’re paying for, take the time to look over the details of your mortgage terms to find out. Neither of these portage insurances provide more benefits than the other, they are designed to benefit your lender so the only “benefit” you can expect is paying less than other home owners.
Factors such as your credit score, your mortgage loan amount, and more will factor into how much you pay for home loan insurance.
How Home Loan Insurance Benefits You and the Lender
As stated before, home loan insurance does not provide any direct benefits to you as a homeowner. Instead, the mortgage insurance directly protects your lender who will be responsible for paying the principal of your loan in the event that you fail to pay. In a sense, mortgage insurance cushions the blow that your lender takes in the event of a failure to pay so they can save money and protect their collateral.
The more of a risk you are for the lender, the more you’ll pay for mortgage insurance. That’s why you need to take the time and look over all of the loan options available to you before signing a particular agreement.
Here are some of the key factors that will determine how much you pay for home loan insurance:
- Credit score
- Whether you have an adjustable or fixed interest rate
- The premium plan that you choose
- Risk factors
- Loan-to-value ratio or your down payment
- Whether you have a refundable premium or not
- Loan term or length
- Percent of mortgage insurance coverage required by your lender
You can use all of these variables to decide on how much you will pay for home loan insurance on an individual basis. Once you take all of these factors into consideration prior to applying for a home loan, you can minimize the amount of money you pay out of pocket each month for coverage.
People Also Ask
What is the benefit of mortgage insurance?
Mortgage insurance directly benefits and protects the lender of the mortgage from having to pay the full principal amount when a buyer fails to pay
How long do you pay mortgage insurance?
The amount of time that you pay for mortgage insurance depends on how much money you put down on the loan initially
How much is PMI monthly?
PMI is calculated with a 0.5%-1% rate to determine the monthly amount, that equals to about $90 a month on a $100,000 mortgage