May 20, 2022 | Sexton Real Estate Group
Mortgage insurance can be a lifesaver for homebuyers in Northern California. It protects lenders from defaults and helps more people achieve the dream of homeownership. But there are also some drawbacks to mortgage insurance that everyone should be aware of before signing up. In this article, we’ll take a look at the pros and cons of mortgage insurance so you can make an informed decision about whether or not it’s right for you.
Acceptance Rates For Mortgage Insurance Are High
Mortgage insurance typically has high acceptance rates because it offers several advantages to homeowners. One of the biggest advantages is that it can help you get a loan with a lower down payment. This is because the mortgage insurance company will cover a portion of the loan if you default on your payments.
Mortgage insurance can also help you avoid private mortgage insurance (PMI). PMI is an extra fee that borrowers with less than 20% equity in their home must pay. Mortgage insurance typically costs less than PMI and can be canceled once you reach 20% equity in your home.
Mortgage Insurance Protects The Lender
Another advantage of mortgage insurance is that it protects your lender in case you default on your loan. This means that if you stop making your mortgage payments, the mortgage insurance company will step in and make them for you, up to a certain amount. This can give your lender some peace of mind, knowing that they won’t lose all their money if you default on your loan.
It Protects Your Family From Mortgage Default
Mortgage insurance is designed to protect your family from the financial devastation that can occur if you default on your mortgage. If you are unable to make your mortgage payments, mortgage insurance will pay off your loan and help keep your home.
Mortgage insurance is not free, however. You will have to pay a monthly premium for this coverage. The amount of the premium will depend on factors such as the size of your loan, the term of your loan, and the type of mortgage insurance you choose.
It Gives Those With Little Financial Resources Peace Of Mind
For people who have tight budgets, mortgage insurance provides peace of mind by making it possible to purchase a home with a lower down payment. Mortgage insurance also protects against financial loss if the borrower is forced to sell the home before the mortgage is paid off. In addition, mortgage insurance can help borrowers qualify for a loan that they might not otherwise be able to obtain.
It Is Expensive
Mortgage insurance does have some drawbacks, however. One is that it can be expensive. The premium you pay for mortgage insurance will depend on a number of factors, including the size of your down payment, the type of loan you’re getting, and the term of your loan. For example, if you’re taking out a 30-year fixed-rate mortgage with a small down payment, you can expect to pay a higher premium than someone who’s taking out a 15-year loan with a larger down payment.
It Does Not Protect The Borrower
Another downside to mortgage insurance is that it protects the lender, not the borrower. If you default on your loan, the mortgage insurer will pay the lender, but you’ll still be on the hook for any remaining balance. You may also be required to pay premiums for the life of your loan, even if you eventually have 20% equity in your home.
It Can Add Up
Mortgage insurance can add up. The premium is usually paid as part of your monthly mortgage payment, but in some cases, it may be paid upfront or rolled into your loan amount. Either way, it will increase the amount of interest you’ll pay over the life of your loan.
Effective Mortgage Insurance Coverage Constantly Declines
The primary reason for this is that as a home’s value appreciates, the equity in the property increases. As the amount of equity in the property goes up, the loan-to-value ratio goes down, and so does the risk to the lender. This decrease in risk means that the lender requires less mortgage insurance coverage.
Another reason why effective mortgage insurance coverage declines over time is that most policies have an annual premium that is paid as part of the mortgage payment. As time goes on and more premium payments are made, the overall coverage decreases.
Lastly, some mortgage insurance policies allow for “automatic termination” once the loan-to-value ratio reaches a certain level – usually around 78%. This means that once the home has appreciated enough, the insurance coverage will automatically end. This can cause a sharp decrease in coverage if it happens before the other two factors have come into play.
While all of these things contribute to a declining effective mortgage insurance coverage, it’s important to remember that the amount of coverage you have is still generally much higher than when you first took out your loan. So while your coverage may be declining, it’s still there to protect you (and your lender) in case of default.
So, should you get mortgage insurance? It depends on your personal situation. If you’re buying a home in Northern California, give us a call today and we can help you figure out the best plan for you. We have years of experience helping people in the Bay Area secure the right type of mortgage insurance for their needs, and we’d be happy to do the same for you.
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