Mortgage Slang 101 - Mortgage Insurance

By
Mortgage and Lending with Homebridge Financial Services NMLS 210215

Mortgage insurance is viewed nearly universally as a bad thing, but in reality, it's a tool to be used that can be very good for home buyers, the housing market and the economy in general.

Why do many complain about mortgage insurance?  Because its expensive, and sometimes difficult to get rid of when it's no longer necessary.  If that's the case, why do I say it can be good for buyers and the economy?  Because it's a tool that allows people to buy a home with less than twenty percent down.

Mortgage insurance insures the lender against the risk of the buyers default (stop making the payments) on the loan.  It does NOT insure the buyers life, like many people think.

The single biggest hurdle for home buyers is accumulating an adequate down payment.  Lenders want buyers to put twenty percent down for two reasons.  First, a buyer with a large down payment is less likely to quit making their payments.  Second, and most importantly, if a buyer does default, the more the buyer put down usually means more equity in the house when the lender forecloses, which means the lender loses less money. 

But, if a buyer wants to buy a $200,000 and has to put up a twenty percent down, that will equal a $40,000 down payment!  Hard to save up, for most buyers.  BUT, with the use of mortgage insurance, that buyer might be able to put as little as $6,000 down!  A lot easier to save. 

So, mortgage insurance can be a very beneficial tool.

With that being said, don't let your lender shoehorn you into only considering monthly mortgage insurance.  There are other options such as single premium mortgage insurance, or "split" mortgage insurance.  These programs can be more expensive up front, but sometimes much less expensive over time.  They don't work for everyone, but they certainly should be looked into.

Comments (2)

Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

We can't live with it and can't live without it. The key is always the right loan and the right mortgage insurance factor that is best for the client. Great post!

Nov 28, 2011 09:36 AM
Sharon Paxson
Compass - Newport Beach, CA
Newport Beach Real Estate

Hi Brett - great information about Mortgage insurance, and excellent explanation. Have a great day!

Dec 07, 2011 04:29 AM