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Mortgage Insurance

Many people don’t understand what mortgage insurance is and may be surprised when it is added to their monthly payment for their mortgage loan.  They have already arranged for paying home owners insurance and didn’t realize there would be an additional insurance.   

Mortgage insurance protects the lender in case you quit making your house payment and default on the loan.  This type of insurance is usually provided by a private insurance company.  Because of the fact that a mortgage loan can be several hundred thousand dollars, the lender needs to be able to recover his money in the case you default on the loan.  The lender charges the borrower the cost of this insurance so that lending the money is not as risky.  This insurance allows the lender to offer low rates to the borrower who needs the home loan, because his risk is lessened by the mortgage insurance.   

The good faith estimate and the truth-in-lending documents should list an amount for mortgage insurance.  It will be a part of your closing costs if the lender has required it on your loan.  Each month when you make your mortgage payment, the monthly insurance amount will be added to this payment.  Lenders typically require a borrower to pay mortgage insurance to cover them, when a loan is given where there is less than 20% equity in the home.  Mortgage insurance can usually be dropped once you have paid enough principal so that the amount of your loan is less than 80% of the value of your home.  Mortgage insurance is often required when mortgage refinancing also if the equity in the home is below 20%.  This is a cost you will want to consider when figuring your monthly budget and determining how much money you want to borrow.   

For people who are looking at bad credit mortgage loans, mortgage insurance will be needed unless they make a 20% down payment on the initial loan as well.  Regardless of which type of mortgage loan you get, you may be required to pay for the additional mortgage insurance in order to get the loan if your equity is less than this 20%.  The rates for mortgage insurance premiums tend to vary from one lender to the next, so it is a good idea to shop around for the lowest rate if you think you will end up paying mortgage insurance.  If you can make a large enough down payment, you won't have to deal with mortgage insurance, so it may be worth waiting a saving for a few more years before you purchase a home.