Home Mortgage Insurance
Lenders today often require home owners to buy a home mortgage insurance policy in order to qualify for a loan or a second mortgage. In fact, most home owners who have taken a mortgage out will deal with a home mortgage insurance police with it. The only time that home owners are not required to purchase a home mortgage insurance policy is if they are able to pay a down payment around 20% of their home’s value. Home mortgage insurance policies are primarily used to protect the home owner and the lender as well. In the event that the home owner is unable to pay their mortgage or defaults on their loan, the home mortgage insurance policy will cover it.
Each state has specific foreclosure laws that dictate the period in which it takes to file for foreclosure. This time period is known as the grace period. If the home owner is unable to avoid foreclosure, and the grace period expires, the issuer of the loan then makes a claim with the home mortgage insurance agency. The lender will receive the maximum amount that is covered under the policy in order to be reimbursed for any loss during a foreclosure. The financial institution is guaranteed to receive all or part of the amount that was lent out to the borrower, even if the borrower defaults.
Home mortgage insurance policies are extremely beneficial to home owners, but they are also beneficial to those who are looking to buy a home. New home buyers are considered riskier investments by financial institutions that issue out mortgages. However, home mortgage insurance policies reduce the overall amount of risk that is associated with new home buyers. A buyer who uses a home mortgage insurance policy when buying a new home will qualify easier for the loan than someone without home mortgage insurance.
Large down payments can be avoided as well when using home mortgage insurance policies. The riskier the borrower is, the more of a down payment they will need when buying a new home. Big down payments are avoided easily by implementing a home mortgage insurance policy that guarantees the issuer of the loan their money back. Home mortgage insurance policies vary in price depending on the borrower and the amount that is being financed. Home mortgage insurance policies typically cost about 1 percent of the total value of the home every year.
The FHA, or the Federal Housing Authority stipulates how much home mortgage insurance rates will cost to each individual borrower depending on their credit and other factors. The borrower is required by the FHA to pay the first year’s premium along with the loan to guarantee the lenders return. Home buyers have the option to avoid this premium by paying it in cash during the time of signing the home loan. Another benefit that home owners can take advantage of is canceling the home mortgage insurance policy. Lenders will allow the home owner to cancel their home insurance when enough equity has been built throughout the years.
The reason why a home mortgage insurance policy can be cancelled after enough equity is built up is because the equity will act as the insurance policy. If the home owner defaults while having enough equity to cover they loan, the financial institution will require the equity as payment. In other words, the more in debt the home owner is, the more home mortgage insurance, they will need to cover the loan in case of a default. A home mortgage insurance policy does not eliminate the obligation to pay on the borrower's behalf. The insurance company can collect money back from the home owner who has defaulted on their loan depending on the state laws.