From my experience, there is nothing more misunderstood (in the mortgage business) than mortgage insurance. Borrowers want to know what it is and why, for goodness sake, must they pay it. AND, if/how they get it back.
First, what it is, Mortgage insurance is an amount paid by the borrower to cover lender losses in the event of mortgage loan default. The majority of loans require mortgage insurance if the equity in the property will be less than 20%. This is for both purchases and refinances. Without mortgage insurance, there would be far fewer mortgages approved. In fact, most people would not be able to buy a home in the absence of mortgage insurance.
Mortgage insurance should not be confused with mortgage LIFE insurance. The latter is “real” life insurance. The amount of the mortgage life insurance is typically enough to pay a death benefit to the beneficiary in the event of the death of the primary loan borrower. The theory being, with the life insurance, the family is able to remain in the home and pay the mortgage.
Okay, back to mortgage insurance. Borrowers dislike mortgage insurance because it can add a hefty chunk of change to the monthly payment. Thanks to a tax law change in 2007, mortgage insurance premiums may be tax deductible. Consult a tax professional for details and exceptions.
How much does mortgage insurance cost? Primary factors are the type of property, down payment, credit score, and type of loan. This means Joe and Bob may pay a different amount for similar insurance – as is the case for most insurance.
Borrowers also often ask how do they get the money back that was paid for mortgage insurance premiums. But that’s not how it works. Think of other types of insurance. Is any money refunded for auto insurance premiums, or health insurance premiums, or homeowner insurance premiums? No. Insurance is meant to cover the risk of loss. Whether any particular homeowner had a loss or not, the “risk of loss” was still there. Therefore, no refund is due.
When can mortgage insurance premiums be discontinued? Generally, once the equity in the property reaches at least 20%, mortgage insurance can be stopped. Home value would be determined by an appraisal of the property – done by the lender’s appraiser.
For those with FHA mortgages, the rules are a bit different. See this post on the blog.
Sure, it may be a pain in the gazoo, but you might not have a mortgage without mortgage insurance.
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thanks for this clarification. mortgage ins is very confusing.