Mortgage insurance explained

Why take out mortgage insurance?

Mortgage insurance is more than just an option; it's usually one of the essential steps of purchasing a home. Normally, when you take out insurance, it's to protect yourself from the consequences of something bad: a car accident or a flood at your home, for example. Mortgage insurance is different. It doesn't protect you - it protects the lender. So why should you pay for it? The answer is that, in most cases, you have to. Most lenders won't let you borrow money unless you take out mortgage insurance, particularly if your down payment is less than twenty per cent of the property's purchase price.

Government-assisted mortgage insurance programs

Being well informed about what's available is the key to saving money on the necessary evil of mortgage insurance. Before you sign up to any insurance policies, find out the answers to the following questions:

* Do you qualify for Federal Housing Association (FHA) insurance? (USA)
* Do you qualify for any other government-assisted programs, such as Rural Development Services or Veterans Administration? (USA)

You can find out whether or not you qualify for government-assisted programs by calling the Federal Trade Commission on 1-877-382-4357 (USA). If you do qualify, you should take advantage of this, as it will save you money.

Private mortgage insurance

If you don't qualify for any government-assisted programs, you will probably have to take out private mortgage insurance (PMI) or life assurance. This allows you to purchase a home with a deposit as little as three per cent, but the smaller the deposit, the more insurance you will have to take out. The less money a buyer puts down on a home, the more likely that buyer is to default on a mortgage payment, so lenders want extra protection against borrowers who make small down payments.

Sometimes you pay for the whole PMI policy when you buy the house, but it's more common to pay a fee with each monthly payment of your mortgage.

Private mortgage insurance and the law

The Homeowner's Protection Act 1998 is the most relevant law here. It applies to most residential mortgages signed after July 29, 1999, but does not apply to mortgages insured by the government such as those discussed above. Nor does it apply to insurance policies paid by the lender.

Among the most important provisions of the Act is the stipulation that you shouldn't have to pay mortgage insurance after you have reached 22 per cent equity in your home (this is based on the property's original value). This means that there should be automatic termination of your mortgage insurance policy when you reach 22 per cent equity. However, this does not apply if you haven't been keeping up your payments prior to this.

If you are not covered under the new law, your lender has an obligation to tell you about what termination or cancellation rights you may have.

If you are covered under the new law, take time to find out exactly what your rights and obligations are under the law. Knowing this could save you a lot of time and money.

 

 

 

 

 

 

© AskFinancially.com 2008

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