13 Benefits Of Taking Out Mortgage Insurance  

 

Getting a mortgage loan is not easy for everyone because it entails paying at least 20 percent down payment in ideal conditions. Also, a borrower needs to have a good credit score to qualify and get approved. But one way to help borrowers get approved for a mortgage loan is getting mortgage insurance.

 

Mortgage insurance refers to an insurance policy that protects the lending company if the borrower cannot pay, dies before paying the mortgage, or is unable to meet contractual obligations. Some mortgage lenders require their borrowers to pay a portion of the mortgage insurance cost as one of the conditions of a mortgage loan.

 

Whether you're a borrower or a mortgage lender, you'll benefit from taking out mortgage insurance, which will be discussed in detail below. This guide will cover the benefits for borrowers and lenders and different types of mortgage insurance, including mortgage life insurance, etc..

 

Benefits for Borrowers

 

1. Increase Chances of Mortgage Loan Approval

 

People who work as self-employed or receive commissions usually can't meet the standard lending criteria. However, getting a policy and having a good credit history can increase your chances of approval.

 

2. Financial Protection

 

Mortgage life insurance is a specific type of mortgage insurance that protects the lender if the borrower passes away. In the event of life-altering disease, death, or disability, mortgage life insurance can help the borrower's family still stay in the home by covering payments.

 

When it comes to comparing mortgage Life Insurance vs traditional life insurance, mortgage life insurance has a lot of benefits to offer. Unlike traditional life insurance that the only payout is when the borrower dies, mortgage life insurance pays out in chronic, terminal, or critical illness. Also, it has other benefits like waiving the borrower's premium payments when it becomes unemployed.

 

Taking out mortgage insurance provides financial protection unmatched by traditional life insurance. Talk to a mortgage life insurance agent to know your options.

 

 

3. Obtain Mortgage With Lower Downpayment

 

Saving a 20 percent down payment for many people can be a barrier to purchasing a home. Mortgage insurance helps borrowers obtain mortgages with as little as 3 percent down payment, protecting investors and lenders from losses if borrowers miss paying their mortgage loan. Depending on the policy terms, the loan premium can be paid by the loan provider or the borrower. 

 

4. Flexible Payment Options

 

With mortgage insurance, borrowers can be paid in different ways, which gives borrowers greater flexibility. The different payment options include lender-paid, borrower-paid, and split premium plans.

 

Some insurers (insurance providers) require policyholders to pay the upfront premium and monthly premiums. Also, borrowers pay the principal amount, property insurance, taxes, and interest charges. But those who have chronic medical conditions usually face stricter conditions.

 

5. Mortgage Insurance Is Deductible

 

Congress usually introduces new tax code provisions for a specific time frame, which could be the result of budgetary issues or other reasons. Congress can extend the deduction or even make it permanent.

 

Mortgage insurance has been part of tax deductions since 2007, which has been renewed for 2018, 2019, and 2020. It's important to consult a tax advisor on how deduction becomes applicable to a particular circumstance under the laws of taxing jurisdiction and the Internal Revenue Code.

 

 

6. Mortgage Insurance Cancellation Option

 

Borrowers may request termination of mortgage insurance if they can make timely payments and when the outstanding balance is already amortized to 80 percent. However, the cancellation option may not be possible for those who have bad payment records. Financial institutions consider these borrowers as high risk, and lenders must inform their borrowers about these provisions.

 

Here are some important things to know about canceling mortgage insurance:

      ●      You can cancel mortgage insurance by paying the mortgage principal.

      ●      When borrowers reach 22 percent equity (78 percent LTV), mortgage insurance cancels automatically or when the loan term's the halfway point is reached through normal amortization.

      ●      Cancellation can result in partial refunds or lower monthly mortgage payments of premiums, depending on the payment option selected.

 

7. Great Option for Vacation Property

 

Staying in hotels is great, but is not a good investment for most visitors. On the other hand, second homes potentially yield a greater return of investment while providing a perfect vacation spot and skipping booking hassles.

 

A buyer can get a mortgage loan to buy a second home. Second homes usually come with lower mortgage rates as compared to rental or investment properties, while a primary residence can be bought with three percent down in most cases. For a vacation home, it takes about ten percent downpayment to buy a vacation home if the application is impressive. Otherwise, the lender may require a 20 percent minimum downpayment.

 

However, credit score requirements are higher for a second home than a primary residence. One way to defray monthly mortgage expenses is by renting out the vacation home when not being used. To get qualified to get a mortgage loan for a second home purchase, getting mortgage insurance can help.

 

Mortgage insurance is an excellent option for those who want to buy a second home, a cottage, or a vacation property. Both the lender and the borrower gain benefits, such as payments covered in case a borrower defaults payments and payout given to a borrower if he dies or becomes terminally ill.

 

 

8. Mortgage Insurance to Get Home Improvement Discount

 

For home improvements, some insurers offer discounts to make properties energy-efficient. Discounts are offered to borrowers who want to buy an energy-efficient home. Some insurance policies enable home buyers to save on truck rentals, moving supplies, and household appliances.

 

9. Other Benefits

 

Homeowners may also receive discounts and gift certificates on relocation, car rentals, hotel reservations, and more.

 

 

Benefits for Mortgage Lenders

 

1. Risk Protection

One of the greatest benefits of mortgage insurance among financial institutions or lenders is risk protection. Mortgage insurance protects financial institutions if the borrower dies, default payment, or have other circumstances prevent from making payments. Lenders will then have peace of mind that their borrowers will be able to pay off their loans.

Extra loan provisions can be formulated for added protection because borrower-paid mortgage insurance can be canceled as long as the borrower reaches 20 percent equity (80 percent loan total value or LTV) in their homes.

 

2. Enhances the Mortgage Management Process

With an available mortgage insurance, the mortgage management process of financial institutions is enhanced. When a financial institution considers and uses mortgage insurance, effective information systems, and delinquency management strategies are used. It promotes effective property valuation that benefits loan providers.

 

3. Mortgage Insurance Helps in Risk Management

Financial institutions and other mortgage loan providers can streamline their lending process to increase the mortgages that they offer to borrowers. Because mortgage insurance companies always coordinate with financial institutions, risks, defaults, and net loss are minimized.

Here's how mortgage insurance can help lenders and financial institutions in risk management:

      ●      Mortgage insurance helps financial institutions in managing the risks related to high loan-to-value ratios.

      ●      Insurers gather data to assess risks and employ sound decision-making strategies.

     ●      Insurers analyze, assess and monitor risks, and administrate programs. It is highly beneficial for mortgage loan providers when it comes to simplifying decision making.

 

4. Tailored Policies for Loan Providers

Mortgage insurance policies are made tailor-fit to the needs of lenders or loan providers while taking different factors into consideration. Financial institutions have a lower risk to take with mortgage insurance. For example, there's less risk if a lender offers mortgages for owner-occupied homes as compared to for condominiums. Also, fixed-rate mortgages are less riskier than adjustable-rate ones.

Here are the important factors on creating tailor-fit mortgage insurance policies for lenders:

      ●      Loan purpose and amount

      ●      Geographic location

      ●      Occupation

      ●      Employment status

      ●      Type and the value of the property

 

How Mortgage Insurance Works

 

Mortgage insurance covers a percentage of a mortgage lender’s loss. So how does mortgage insurance works?

 

Here's an example:

 

Mortgage insurance that covers a certain percentage of the principal mortgage loan means that the lender won't lose everything if the borrower becomes unemployed and can't make payments.

 

For instance, if a borrower still owes 85 percent or $170,000 and the insurance policy says it will cover 25 percent of the principal mortgage loan, the insurance company will pay $42,500 to the lender. It means that the lender won't lose $170,000, only $127,500.

 

In short, the mortgage insurance compensates lenders for taking the higher risk of lending borrowers. Because of this, lenders can make mortgage insurance one of the requirements for loan approval.

 

Types of Mortgage Insurance

 

There are many types of mortgage insurance and the most common forms are based on the payment options. When choosing the best type of mortgage insurance, it’s important to assess your needs and payment capacity.

 

Here are the types of mortgage insurance available nowadays:

 

1. Borrower-Paid Mortgage Insurance

 

Borrower-paid mortgage insurance comes as an additional monthly fee that the borrower pays with the mortgage payment. Once the loan closes, the insurance should be paid every month until 22 percent of equity has been paid. Generally, it takes 11 years to get borrower-paid mortgage insurance paid, and the lender automatically cancels the insurance.

 

Some loan providers allow borrowers to cancel the mortgage insurance sooner, depending on home value appreciation. For instance, if the borrower accumulated 25 percent equity because of appreciation earlier than expected, the investor or lender can cancel the mortgage insurance.

 

While refinancing can help cancel the mortgage insurance payments early, a borrower should weigh the cost and compare refinancing against paying mortgage insurance premiums. Prepaying the mortgage principal is one way to achieve 20 percent equity early.

 

2. Single-Premium Mortgage Insurance

 

The borrower pays the single-premium mortgage insurance in a lump sum upfront, either financed into the mortgage or in full at closing. One benefit of this mortgage insurance to the borrower is a lower monthly payment.

 

The borrower may also qualify to borrow more and worry less about refinancing mortgage insurance. However, the risk is that if the borrower sells or refinances within a few years, the premium is not refundable, and the interest on it still applies in the life of the mortgage. A borrower can then negotiate with the seller or builder (for a new home) to pay the single-premium mortgage insurance if the borrower cannot pay the 20 percent down payment upfront.

 

 

This mortgage insurance is highly recommended if the borrower plans to stay in the house for three or more years. However, not all financial institutions or mortgage lenders offer this type of insurance. It's important to ask a mortgage loan officer to know all mortgage insurance options.

 

3. Lender-Paid Mortgage Insurance

 

In lender-paid mortgage insurance, the lender pays the mortgage insurance premium over the life of the mortgage loan. This mortgage insurance is built into the loan, so the borrower cannot cancel the mortgage insurance even if the equity reaches 78 percent.

 

The only way to lower the monthly payment is refinancing. The interest rate won't decrease unless 20 or 22 percent equity is reached. Even if this mortgage insurance has a higher interest rate, the monthly payment could be lowered as compared with making monthly mortgage insurance payments, and the borrower could be eligible to borrow more money to buy a property.

 

4. Split-Premium Mortgage Insurance

 

It's the least common type of mortgage insurance, wherein the borrower pays a part of the mortgage insurance as part monthly or lump sum at closing. With split-premium mortgage insurance, you don't need extra cash for upfront insurance payment. That's why this mortgage insurance is highly recommended for borrowers having a high debt-to-income ratio.

 

5. Federal Home Loan Mortgage Insurance

 

This mortgage insurance comes in loans underwritten by the FHA mortgage or Federal Housing Administration. It's a requirement for all FHA loans and with 10 percent or less down payments. The home buyer still needs to wait 11 years before canceling the mortgage insurance premium from the loan.

 

 

Conclusion

 

Mortgage insurance is a flexible type of insurance that offers tons of benefits for borrowers and lenders alike. Mortgage lenders are protected when a borrower cannot meet obligations for any reason, defaults payments, or dies. On the other hand, borrowers benefit from financial protection or payout the mortgage insurance provider in case of death, terminal illness, or even unemployment.

 

When choosing mortgage insurance, it’s crucial to assess your payment capacity, financial needs, and your ongoing and future expenses. One type of mortgage insurance is mortgage life insurance, in which the borrower and his family receive a payout in case of chronic or terminal illness, unemployment, or death. This type of insurance provides more benefits than traditional life insurance.