When you find the home of your dreams and you get pre-approved for a loan, you might not realize that your lender is likely to require a number of costs in addition to your mortgage payment. Most people aren’t surprised that they have to shell out the dough for a homeowners insurance policy. In the event of damage resulting from vandalism, theft, natural disaster, or other types of loss, lenders want to make sure that homeowners have access to the funds needed for repair or replacement in order to maintain the value of the property. After all, buyers are more likely to default on a loan if their property is rendered useless and/or unsalable. But you might also find yourself on the hook for mortgage insurance, which is different from homeowners insurance, and you need to know how long you’ll have to foot the bill for this added expense.
First you need to understand what mortgage insurance is. Whereas a homeowners insurance policy is designed to protect the homeowner and pay out to the individual in the event of damage or loss, a mortgage insurance policy protects the mortgage lender. In the event that a buyer defaults on the mortgage loan, this policy will compensate the lender (and/or investors) for losses. Defaults could occur due to a loss that isn’t covered by homeowners insurance and for which the buyer cannot pay out-of-pocket, such as natural disasters not covered by the homeowners insurance policy. Or the homeowner may suffer job loss, exceedingly high medical expenses, or even death, leaving them unable to pay.
And if the home is not valuable enough to sell in order to recoup costs (due to changes in the housing market or damages to the property), lenders will want to receive compensation. Mortgage insurance can cover these gaps. But not every homeowner is required to purchase this type of insurance. Under what circumstances do homebuyers have to spring for mortgage insurance and how long must they carry such policies? It depends largely on the type of loan you take out and the amount of money you put down.
Certain types of loans, such as FHA (Federal Housing Administration) loans, require mortgage insurance until the loan has been paid in full. When the government helps people buy homes, they want to make sure they get their money back, especially since this funding comes from the taxes we all pay. You may also be required to carry mortgage insurance for a time if your down payment for a mortgage loan is less than 20% of the purchase price of the property. Since the lender is taking on a greater burden of risk by fronting you more money than normal, you’ll have to offset this by paying for the protection of mortgage insurance. Generally speaking, though, you can cancel this extra insurance once you have paid up to the 20% mark on your loan.
As you can see, there are different sets of circumstances that will require you to carry a mortgage insurance policy, and the duration of your policy will depend on your loan type and the requirements of the lender. So it’s best to square away the details before you sign on the dotted line if you want to ensure you’re making a wise financial decision.
Leave a Reply