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Who Could Benefit from Mortgage Insurance?

Private mortgage insurance is a policy that is taken out to assure lenders that they will receive their payments should the borrower default on a loan. This type of policy is different from life insurance taken out on the mortgage, because it leaves the borrower no benefit should they become unable to pay the mortgage due to disability or death. On the surface, it seems that mortgage insurance is primarily beneficial to the lender, because it is designed for his or her protection. Yet there are advantages to both parties in certain circumstances, allowing borrowers to purchase a home with a lower down payment. Before perusing real estate listings on sites like homesales, it’s helpful to take a closer look at this type of insurance plan to see how it works and who benefits.

How Mortgage Insurance Protects Lenders

The most obvious benefit of mortgage insurance is for the lenders. This insurance policy helps ensure that if the borrower ends up not defaulting on the loan, that the lender will still get their money back. In Australia, mortgage insurance is payable if the LTV or loan-to-value ratio is above 80%. It may also be applicable when this ratio is at 60% for low-doc loans which are given to individuals who are self-employed or otherwise unable to prove income with the usual documents. Premiums can be determined using a sliding scale depending on the initial loan amount and this ratio. There may also be an additional stamp duty on the premium.

The specific rates for mortgage insurance can vary quite a bit, with the lenders determining which factors are most important. These could include the type of premium, the property’s total value, the value of the down payment, and the borrower’s credit history. Using these factors, lenders are able to determine risk and set the rates that will protect their investment.

Advantages of Mortgage Insurance for Borrowers

In most cases, you need to save for years to amass enough money to buy real estate. Down payments are generally at least 20% of the full purchase price of a home. Yet taking out mortgage insurance may help entice a lender to agree to a lower down payment, so that you don’t have to wait as long to save up this money. Mortgage insurance can allow you to qualify with a lower down payment. Once you have paid off at least 20% of your balance, you may be eligible to cancel your mortgage insurance. This may be done automatically or you might have to specifically request cancellation.

It’s also possible in some cases to add the cost of the insurance along with the mortgage loan, to avoid extra closing costs. Usually, the first year of insurance will be due as part of your closing costs. Yet you may be able to negotiate with the lender to pay these on a monthly basis instead.

For borrowers to benefit from mortgage insurance, it’s vital to read all of the fine print and regulations of the insurance policy. You may ultimately not have too much choice when it comes to this mandatory insurance if you wish to buy a house with a low down payment. Yet understanding the terms and conditions will help you make the most of your payments, for maximum benefit.

In the end, there are potential benefits for both parties involved. It’s important to take mortgage insurance into account when you are looking at real estate, as it may factor into your closing costs and ultimate monthly mortgage fees. This will ultimately depend on the down payment and lender requirements.




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Posted 1774 days ago
How neat! Is it really this smilpe? You make it look easy.