Buying a new home is an exciting time for new homeowners, but also one that requires a lot of financial planning. When working with real estate firms and mortgage banks, you’ll find new options and more favorable rates can become available for you through having the loan insured. Like homeowner’s insurance, mortgage insurance is something any new homeowner should think about. Read on to learn more.
Why Is Mortgage Insurance Useful?
Mortgage insurance is a policy that protects a lender or title holder if the borrower defaults on payments, dies, or is unable to make payments due to lack of finances. Banks and other mortgage loaners may make mortgage insurance mandatory or provide better rates and lighter down payments for those who do, similarly to homeowner’s insurance. These tools provide less risk to the mortgage companies by making sure the full cost of the loan can be covered, regardless of what happens.
Private Mortgage Insurance (PMI)
The most common type of mortgage insurance, Private Mortgage Insurance (PMI) helps cover the loan. Typically, these policies allow lenders to reduce the terms of the loans, allow individuals to qualify for more mortgages. For example, most loans require a 20% down payment, however with a PMI that number can be much less. Depending on the type of PMI, a monthly or upfront premium may be paid:
- Monthly: This is the most common option and isadded to your mortgage payment. It will be shown on your loan estimate and closing disclosure.
- Upfront: This is a one-time payment which will appear on your loan estimate and may not be refunded if you move or refinance your mortgage loan.
Private Mortgage Insurance Premiums
PMI has different payment plans to satisfy both homeowners and lenders. Before deciding which payment plan is right for you, there are some factors that affect your premium prices:
- Loan-to-Value Ratio: Mortgages must be insured if the loan to value ratio is between 80% to 97%, and depending on the LTV, it will affect what the price will be for the policy.
- Credit Score: Two people may pay the same down payment on a home. However, their credit scores determine the cost of their mortgage insurance policies.
- PMI Rate Adjustments: A loan amount greater than $400,000, and mortgages on second homes will increase your PMI rate.
Benefits of Mortgage Insurance
Mortgage insurance allows potential buyers to gain access to the home market for a reduced down payment. Borrowers are also given more flexibility since there is a range of payment options to cover their mortgage insurance depending on the loan and insurance selected. Mortgage insurance provides a safer loan to the lender and allows the buyer to cancel when 20% of equity is reached on their homes.
Who Should You Get a PMI From?
When you talk with your bank, they usually have a preferred carrier for mortgage insurance. However, it’s important to get a second opinion, especially from an independent insurance agency, about PMIs, homeowner’s insurance, and other policies and procedures that can help lower mortgage costs and even insurance premiums.
Mortgage insurance and homeowners insurance allows you to buy a home at a more affordable rate. Based on your financial situation, different PMI options are available. To learn more, contact the TJ Woods Insurance Agency, and we’ll work with you to find out the options that best benefit you.
