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What is Private Mortgage Insurance?
It's a financial guaranty that insures lenders against
loss in the event a borrower defaults on a mortgage. If the
borrower defaults and the lender takes title to the property, the
mortgage insurer reduces or eliminates the loss to the lender. In
effect, the mortgage insurer shares the risk of lending the money
to the borrower. Mortgage insurance should not be confused with
mortgage life insurance, which provides coverage in the event of
a borrower's death, or homeowner's insurance, which protects the
homeowner from loss due to damage from fire, flood or other
disaster.
Who is mortgage insurance for?
All home buyers can benefit. It allows them to become
homeowners sooner, and it dramatically increases their buying
power -- excellent benefits from a buyer's perspective.
First-time buyers can use a low down payment to help them afford
their first home, or to purchase a more expensive home sooner.
Repeat home buyers can put less money down and gain significant
tax advantages because they will have more deductible interest to
claim. They can also use the cash they would have used for a
large down payment for investments, moving costs or other
expenses.
What does mortgage insurance do
for borrowers?
Without the guaranty of mortgage insurance, lenders normally require a borrower to make a down payment of at least 20% of a home's purchase price, which can mean years of saving for some borrowers. This large down payment assures the lender that the borrower is committed to the investment and will try to meet the obligation of monthly mortgage payments to protect his investment. With the guaranty of mortgage insurance, lenders are willing to accept as little as 0% down from borrowers. Mortgage insurance fills the gap between the standard requirement of 20% down and an amount the borrower can more easily afford to put down on a purchase. A low down payment also allows borrowers to purchase more home than they might otherwise be able to afford.
Without mortgage insurance, a borrower who has saved
$10,000 for the required minimum 20% down payment would only be
able to purchase a $50,000 home.With mortgage insurance (income
and credit permitting), the borrower could make a down payment of
only 10% and purchase a $100,000 home with the $10,000! Or put
$7,500 down on a $75,000 home and use the remaining $2,500 for
decorating, investing, or buying a car or major appliance.
Mortgage insurance broadens a borrower's options.
Who pays for mortgage insurance?
Generally borrowers do. An initial premium is
collected at closing and, depending on the premium plan chosen, a
monthly amount may be included in the house payment made to the
lender, who remits payment to the mortgage insurer. Listed below
are a few of the flexible premium plans for borrowers:
Annuals
The borrower pays the first-year premium
at closing; an annual renewal premium is collected monthly as
part of the total monthly house payment.
Monthly Premiums
The cost is slightly more than
traditional mortgage insurance plans, but monthly premiums
dramatically reduce mortgage insurance closing costs. Borrowers
pay for mortgage insurance monthly as part of their total monthly
house payment, but only need to pay one month's mortgage
insurance premium at closing, rather than one year's.
Singles
The borrower pays a one-time single
premium (instead of an initial premium and renewal premiums).
Since single premiums are typically financed as part of the
mortgage loan amount, no out-of-pocket cash is used for mortgage
insurance at closing.
These plans offer the choice of refundable or nonrefundable
premiums. A refundable premium allows the borrower the
opportunity to receive money back on any unused portion, in the
event that mortgage insurance coverage is discontinued before the
loan is paid in full. The cost for a nonrefundable premium is
slightly less than that of a refundable premium, thereby giving
the borrower a small savings. If coverage is discontinued on a
loan with a nonrefundable premium, the borrower has no
opportunity for a refund.
Is there anything else important
to know?
No. Just remember, with mortgage insurance, borrowers can increase buying power, put less money down and purchase a home sooner. It's as simple as that.
Programs and program availability may vary from state
to state. Premium rates must be
selected based upon the location of the property.
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Send e-mail to John Shea at: loan@mindspring.com
Last modified: July 29, 1996