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A 60-second guide to mortgage insurance

[May 11, 2011.]


In spite of the fact that you are the one paying for the insurance, the policy actually protects mortgage lenders. If you default on the loan, the mortgage insurance policy reduces or eliminates the loss to the lender.

Mortgage insurance and homebuyer benefits

The main benefit to home buyers of mortgage insurance (known as private mortgage insurance or PMI on conventional loans and mortgage insurance premiums (MIP) on FHA loans), is that buyers can qualify for a home mortgage while making a down payment of as little as 3.5 percent on an FHA loan and 5 percent on a conventional loan.

For example, a potential buyer with $15,000 to spend on a down payment would be limited to a home priced at $75,000 with a 20 percent down payment minimum. A conventional loan requiring a 5 percent down payment would allow this buyer to purchase a home priced at $300,000, depending on the buyer's credit and income level.

Types of home insurance

Homeowners sometimes find insurance associated with buying a home confusing. In addition to mortgage insurance, homeowners must purchase homeowners insurance to cover their property and their possessions. Title insurance is required to cover the property for the lender in case of past title errors. Homeowners can also purchase owner's title insurance to protect themselves against title problems. Another optional insurance is mortgage life insurance, a policy that pays for the mortgage if the borrower dies.

Mortgage insurance options

If you are considering an FHA loan, you should know that FHA loans requires an upfront MIP of 1 percent that can be wrapped into the loan balance, as well as an annual MIP which must be paid monthly with your mortgage payment.

Conventional mortgage loans offer options for paying PMI, including an annual payment at the closing followed by monthly payments; one initial monthly payment at the closing followed by higher monthly PMI payments or a one-time, single premium that can be wrapped into the loan balance.

In some cases, mortgage insurance is tax-deductible along with mortgage interest payments and property taxes.

Keep in mind that if you must pay PMI, the mortgage insurance provider will need to approve your creditworthiness for the insurance. If you are struggling with credit problems or have a moderately low credit score due to past problems, you may need an FHA loan in order to qualify. FHA lenders generally have looser credit requirements.

To find out more about home loans in your area, click here.


About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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