Are you in the process of hunting for a house that you can call your own? If yes, and you are planning to make the purchase of the property by taking out a mortgage loan, it is important for you to understand the major role being played by a particular type of insurance product called mortgage insurance. It is also crucial for you not to be misled by the term, since it is possible that you think this product is designed for the purpose of having the loan insured. This type of insurance product actually insures the mortgage lender, not you, the borrower, and not the loan that you will be taking out.
A Brief Overview on this Kind of Insurance
In a nutshell, mortgage insurance insures and protects the lender in the event that the borrower will be unable to make the payments on the loan that has been taken out. This particular type of insurance product was born as a response to lenders (especially financial institutions such as banks) exceeding the normal safe mortgage loan lending margins. Many lenders have extended credit to first time home buyers and who have experienced major loss, because a great percentage of these borrowers were unable to make the payments on time, if they were able to make them at all.
How This Particular Type of Insurance Works
No more than 80% is widely regarded as the normal safe mortgage loan lending margin. In simple terms, this means that a lender will offer a loan of up to (but no more than) 80% of the overall value of the property. The remaining 20% will be shouldered by the home buyer. So if you, as the buyer, will be able to make the remaining 20% deposit as well as pay for applications fees, legal expenses, and the like, the lender will consider your loan as safe, as long as you meet all of the other criteria indicated in the loan contract. In this case, the loan is more likely to get approved.
But what if you do not have enough money to pay off the remaining 20% of the property’s overall value? This is where mortgage insurance comes into play. If the only aspect of your loan application preventing you to get approval is the fact that you cannot shoulder the remaining 20%, the lender may still offer you with the loan. However, you would be required by the lender to purchase this particular type of insurance. This will protect the lender in the event that you will be unable to make the loan payments on time or if you will be unable to repay it all.
The Top Reasons to Get this Type of Insurance Product
Many people think that mortgage insurance is just a way for insurance companies (and lenders for that matter) to make more money. However, if you just take the time to learn more about how such an insurance product can help you as a home buyer, you would realize that it can be helpful to you and not just something that will make you spend more.
To help you better understand the importance of getting this particular insurance, here are some of the top reasons why:
• Realize your Dreams of Finally becoming a Home Owner – By obtaining a mortgage insurance policy, you have higher chances of getting your loan application approved. Keep in mind that this can be a proof that you are really determined to become a home owner, so by assuring the lender, you can realize your dreams of finally owning a house.
• Be Eligible for a Lower Mortgage Interest Rate – There are also many lenders who offer lower interest rates to borrowers who have this kind of insurance product. The rates that you will be offered with may even be the same as those being offered to buyers with larger down payments.
• Get Financial Assistance in Times that you Need it Most – This is possibly the greatest benefit of carrying a mortgage insurance policy. When you have this type of insurance, you can rest easy knowing that you will still be able to repay the loan during the times that you will otherwise be unable to. Whether your inability to repay the loan is because of unemployment, serious medical conditions, or other financial difficulties, your loan payments will be taken care of by your insurance policy.
Important Facts about this Insurance Product you need to be Aware of To ensure that you completely understand what mortgage insurance is, here is rundown of the most important facts about this product that you need to be aware of.
• This product insures the lender and not you nor your loan.
• The insurance premium will be payable by the borrower, in this case, you, and the total amount can reach significant amounts depending on the amount of money you borrowed
• You would only need to pay for this particular type of insurance once, not unlike with most types of products that require monthly premium payments
• Make sure that you get an accurate estimate (or quote) for the insurance premium before you begin your search for a home
In conclusion, mortgage insurance can help you secure the loan that you need to finally be able to make the transition from being a simple renter to a full time home owner. Even if you would need to spend considerable amount of money on obtaining this insurance policy, it is definitely worth it if you really want to finally be able to own a house.