All You Need to Know About Mortgage Insurance
I've been an Atlanta mortgage lender for many years. When it comes to buying a home, whether it's your first home or second, there is a list of considerations that you need to keep in mind along the way. There's the location, finding out how much you can afford, and what you deem is the perfect home for you.
When looking at affordability, many people forget to add in the cost of mortgage insurance. The down payment you use will affect how much you will need for it. Some even wonder if they really need to have it. We're going to look at what mortgage insurance is, is it needed, what it doe for you, and more, to clear away the confusion.
What is Mortgage Insurance?
Mortgage insurance, or private mortgage insurance, is there to protect your lender from experiencing any losses should you default on your mortgage payments. This is not the same thing as homeowners insurance. Homeowners insurance protects your home and personal belongings in case of damage. PMI protects the lender and you are responsible for paying for it, however, you won't benefit from making a claim on it.
There are benefits you do gain with mortgage insurance though, especially when you are making a smaller down payment on a home, or have a low credit score. Mortgage insurance gives lenders that added confidence needed to approve you for a mortgage. This opens up the possibility of homeownership to more people.
How Does Mortgage Insurance Work?
Mortgage insurance can be mandatory for some loan types. Your lender will generally choose a mortgage insurer to add to your mortgage package. However, not all home buyers are required to have mortgage insurance, such as those who contribute 20% or more of the down payment.
Usually, your mortgage insurance payments are made monthly and are included in your monthly repayments made to your lender. It's counted as a portion of the escrow of your payments. Lenders will then make the mortgage insurance payments on your behalf to the insurer. Another way that mortgage insurance can be made is as a one-off premium that you pay at closing. Sometimes this is done as a mix of the two options.
Can Mortgage Insurance be Cancelled?
You do have the option to cancel your mortgage insurance payments once the equity in your home has reached 20%. There are a few ways to cancel or skip mortgage insurance altogether. You can request a cancellation from your lender. You could also refinance your mortgage to drop the mortgage insurance payments. However, the 20% equity rule still applies even in this case. The best way to avoid having to pay mortgage insurance is to wait until you have that 20% down payment.
The main benefit of having mortgage insurance is for those who aren't able to make that 20$ down payment or whose credit score is a bit on the low side. It gives them a chance to get on the property ladder. If you need help determining whether you need mortgage insurance or not, and how much it could cost you, give our Atlanta mortgage lenders a call today!