The mortgage insurance, provided by any company, can reduce the losses incurred by the lender in the event, a borrower defaults on mortgage loan. In other words, the insurance actually relieves off the lender by sharing the risk involved in lending the money to the borrower.
However, this type of insurance should not be confused with the mortgage life insurance or homeowner’s insurance, which provide coverage to the borrower in case of sad demise or the homeowner in case of damage from natural calamities respectively.
The benefits are manifold and such mortgage insurance can be availed by those seeking to buy homes for the very first time. The first time, buyer can buy a cheap home by paying a little down payment, or they can choose to purchase an expensive one later. This type of insurance is great in a sense that it allows the first time buyer to own their first home. The Mortgage Insurance also benefits the repeat buyers in taxes by allowing them to pay fewer down payments. The repeat buyers can claim more deductible interest. Instead of paying a large down payment amount, they can use the same money for moving cost or any other investment.
Now, we shall take a look at how the mortgage insurance works. Generally, the borrowers pay the premium for the insurance.
Depending upon a premium plan, a monthly amount of premium is included in the payment paid to the lender. The lender then remits this premium amount to the mortgage insurer. A typical mortgage insurer offers flexible mortgage insurance premium plans to the borrowers. Some of these plans are listed below:
ñ Annuals: Usually in this type of insurance plan, the first year premium is paid at the closing by the borrower. The premium is collected in the house payment made to lender on a monthly basis.
ñ Monthly Premiums: In this type of premium plan although the cost is slightly higher than the rest of the mortgage plans, but the monthly premiums reduces the closing cost of the insurance. Instead of paying premium of one year at closing, the borrower only needs to pay only one month premium.
Singles. In this type of plan, the borrower opts to pay one single premium one time only. He is not required to pay initial or any follow up premiums. The main advantage is that the premium cost is usually covered along with approved mortgage loan amount. The borrower does not need to pay any further amount at closing.
Refundable Premium
The Mortgage Insurer plans offer the choice of two premiums: refundable and nonrefundable. In case if the borrower decides to discontinue the insurance coverage before fully paying out the mortgage loan, then he can claim back the premium in form of money. This is known as refundable premium.
Nonrefundable Premium
In this type of premium, the cost is slightly less than of the refundable premium. However, if the borrower discontinues the insurance coverage against the loan, then he cannot claim back the premium.
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