What is Mortgage Insurance?


Owning a home is one of the greatest achievements you can ever make in a lifetime. However, at times, you may not be able to afford the down payment required by the lender or investor to become a homeowner.

This is where mortgage insurance sets in the equation. Mortgage insurance enables you to own your dream home at a down payment lesser than the 20% of the total home value as required by law. You do not have to sweat out for an extended period to come up with the down payment because Private Mortgage Insurance enables you to become a homeowner at a lower price while protecting the lender’s interests.

Mortgage insurance is an insurance policy designed to compensate lenders for losses incurred when homeowners default their mortgage loans. PMI is the most common type of mortgage insurance.

Meaning of Private Mortgage Insurance
Private Mortgage insurance is designed to compensate the lender if you default on your loan and your home value is not worth enough to repay the debt through foreclosure. PMI is the exact opposite of mortgage protection insurance which protects you as a borrower by ensuring that your mortgage is paid off when you die before clearing your debt.

When is Private Mortgage Insurance required?
Your lender will insist that you get private mortgage insurance when you are not able to raise a down payment equivalent to 20% of the total home value. This is beneficial to both you and the lender because you will own your house with a lower down payment and the lender will be assured of no losses in case you default on your mortgage.

Types of Private Mortgage Insurance
There are different levels of PMI which vary in terms of amount and duration of payment. This is advantageous to the homeowner as you have a wide variety of insurance plans from which you can choose the one that suits you.

1. Borrower Paid Mortgage Insurance(BPMI)
This is the most common type of Private mortgage insurance. The borrower pays a specific amount of money in addition to his mortgage payment. The borrower pays BPMI on a monthly basis until you raise 22% of the initial value of your home. At this point, your BPMI will be automatically canceled provided you do not default on your mortgage repayment.

2. Single Premium Mortgage Insurance (SPMI)
With SPMI, you pay the mortgage insurance upfront in huge amounts at the closing of the deal, or it is financed into the mortgage. Your monthly repayment amount with SPMI will be less compared to when using BPMI. This is beneficial if you would want to borrow more money to own a home.

3. Lender Paid Mortgage Insurance
This type of PMI is the exact opposite of Borrowed Paid Mortgage Insurance because it is the lender who covers the mortgage insurance on behalf of the borrower. After that the borrower will pay for the PMI throughout the duration of his mortgage loan at a higher interest rate. The other difference with BPMI is that you cannot cancel this type of PMI until your home equity reaches 78% because it was included in your mortgage loan.

4. Split Premium Mortgage Insurance
It is considered a hybrid of the Borrower Paid Mortgage Insurance and Single Premium Mortgage Insurance because you pay part of your mortgage insurance up front when closing the deal and part of it monthly. The advantage with this type of PMI is that you do not have to raise a lump sum at the closing of the deal as you would with SPMI and also not make high monthly payments as you would do with BPMI.

Why You Should Get Mortgage Insurance
Mortgage insurance helps you to own your dream home with a deposit of less than 20% of the purchase price. PMI enables you to gain access to the housing market more quickly as compared to raising money to reach the 20% down payment required by Federal Law. Moreover, the lender will also be secured from losses that can be incurred when a borrower defaults mortgage payments.

Private Mortgage Insurance is one of the ideal insurance policies that are beneficial to homeowners. It enables them to own homes with lesser down payments and still manage to clear their mortgage loans using friendly insurance plans.


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